Annual Report

Annual Report BABCOCK & BROWN JAPAN PROPERTY TRUST Annual Report 2008

www.bbjapanpropertytrust.com

2 0 0 8

Corporate Directory

Contents

PRINCIPAL REGISTERED OFFICE Level 23, The Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia

1

Highlights

24 New Properties

2

Chairman’s Report

33 Corporate Governance Statement

4

Managing Director’s Report

47 Directors’ Report

8

Review of Results & Operations

57 Financial Statements

10 Senior Management

98 Directors’ Declaration

12

99 Independent Auditor’s Report

Acquisitions & Asset Management

15 Portfolio Overview

101 ASX Additional Information

22 Property Locations

103 Appendix – Ownership Structure

RESPONSIBLE ENTITY BABCOCK & BROWN JAPAN PROPERTY MANAGEMENT LIMITED Level 23, The Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia T: +61 2 9229 1800 F: +61 2 9216 1752 CUSTODIAN BABCOCK & BROWN ASSET HOLDINGS PTY LIMITED Level 23, The Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia DIRECTORS OF RESPONSIBLE ENTITY Allan McDonald (Chairman) Eric Lucas (Managing Director) Phil Green Paula Dwyer John Pettigrew COMPANY SECRETARY OF RESPONSIBLE ENTITY Melanie Hedges

About Babcock & Brown Japan Property Trust The Babcock & Brown Japan Property Trust (“BJT” or ”the Trust”) was the first Australian listed property trust with the strategy of investing solely in the real estate market of Japan.

BJT was established on 31 January 2005, became a registered scheme under the Corporations Act 2001 on 17 February 2005 and listed on the Australian Securities Exchange on 4 April 2005.

Initial equity of A$280 million was raised and interests in a diversified portfolio of 12 office and retail properties located in the central and greater Tokyo area were acquired for ¥47 billion (approximately A$600 million).

At 30 June 2008 BJT held interests in a portfolio comprising 44 office, retail and residential properties with a book value of ¥166 billion (approximately A$1.6 billion).

The Responsible Entity of BJT is Babcock & Brown Japan Property Management Limited (ABN 94 111 874 563) (“BBJPML”) (a subsidiary of Babcock & Brown Limited). Asset management services in Japan are generally undertaken by Babcock & Brown Co., Ltd. (also a subsidiary of Babcock & Brown Limited).

UNIT REGISTrar LINK MARKET SERVICES LIMITED Level 12, 680 George Street Sydney NSW 2000 Australia T: 1800 881 098 (within Australia) T: +61 2 8280 7699 (outside Australia) F: +61 2 9287 0303 ASX Code: BJT Email: registrars@linkmarketservices.com.au www.linkmarketservices.com.au AUDITORS PRICEWATERHOUSECOOPERS 201 Sussex Street Sydney NSW 1171 Australia INTERNET ADDRESS www.bbjapanpropertytrust.com

DISCLAIMER Babcock & Brown Japan Property Management Limited (“Responsible Entity”) (ABN 94 111 874 563) is the Responsible Entity of Babcock & Brown Japan Property Trust (“The Trust”) (ARSN 112 799 854). The Responsible Entity is a subsidiary of Babcock & Brown Limited (“B&B”) (ABN 53 108 614 955).

Investments in the Trust are not liabilities of B&B or any entity in the Babcock & Brown Group, and are subject to investment risk including possible loss of income and capital invested. Neither the Responsible Entity nor any member of the Babcock & Brown Group guarantees the performance of the Trust or the payment of a particular rate of return on the Trust’s securities.

The information contained in this report does not constitute an offer of, or invitation for subscription or purchase of, or a recommendation of, securities in the Trust. In providing this report, the Responsible Entity has not considered the investment objectives, financial situation and particular needs of an investor. Before making any investment decision with respect to securities issued by the Trust, an investor should consider its own investment objectives, financial circumstances and needs, and if necessary consult appropriate professional advisers.

The Responsible Entity is not licensed to provide financial product advice. This report is for general information only and does not constitute financial product advice, including personal financial product advice.

The Responsible Entity, as the Responsible Entity of the Trust, is entitled to fees for so acting. The Trust and its related corporations, together with their officers and directors and officers and directors of the Trust, may hold securities in the Trust from time to time.

This report may include information forecasting or projecting future outcomes. Such outcomes may be affected by a wide range of influences outside of the Responsible Entity’s control. In respect of such forward‑looking information, no representation or warranty is made by or on behalf of the Responsible Entity that any projection, forecast, forward-looking statement, assumption or estimate contained in this report should or will be achieved.

This Annual Report for the Trust has been prepared to enable it to comply with its obligations under the Corporations Act, to ensure compliance with the ASX Listing Rules and to satisfy the requirements of the Australian accounting standards. The responsibility for preparation of this Annual Report and any financial information contained in this Annual Report rests solely with the directors of the Responsible Entity as the Responsible Entity of the Trust.

The Board of BBJPM is responsible for protecting the rights and interests of all BJT Unitholders and is accountable to investors for the overall governance and management of BJT. At 1 September 2008, BJT had 3,501 Unitholders and a market capitalisation of approximately A$425 million.

Note: Japanese appearing in this report is for decoration purpose only. No accuracy of translation is warranted.

Highlights for the year ended 30 June 2008

Distributions

NTA A$M

8.00

1.5

7.00

CENTS PERCENTS UNIT PER UNIT

6.00 8.00 5.00 7.00

5.38 4.38

4.00 6.00 3.00 5.00

5.75

5.75

5.38

6.15

6.33

1.23 A$M

1.5 1.0 6.15

1.39

6.72

1.39

0.96

6.72

6.33

1.0 0.5

4.38

1.21

1.23

1.21

IPO

Jun 06

Jun 07

Jun 08

IPO

Jun 06

Jun 07

Jun 08

0.96

2.00 4.00 1.00 3.00 0 2.00

0.5 0 Dec 05

Jun 06

Dec 06

Jun 07

Dec 07

Jun 08

Dec 05

Jun 06

Dec 06

Jun 07

Dec 07

Jun 08

1.00 0

0

60

VALUE (¥ BILLION) PROPERTYPROPERTY VALUE (¥ BILLION)

Portfolio Growth

165.6

160 200 120.6

120 160 80 120

0 40

165.6

47.1 Jun 05

94.7

39.8

53.7

36.0 31.5

46.3 39.8 36.0

18.8 31.5

30 10 20 0

Jun 06

53.7

46.3

50 30 40 20

120.6

40 80

50 A$M 60 40

94.7

47.1

Net Property Income

Jun 07

Jun 08

18.8 Dec 05

Jun 06

Dec 06

Jun 07

Dec 07 Jun 08

Dec 05

Jun 06

Dec 06

Jun 07

Dec 07 Jun 08

10

0

0 Jun 05

Jun 06

Jun 07

Jun 08

Babcock & Brown Japan Property Trust Annual Report 2008 – Highlights

A$M 200

1

Chairman’s Report Dear fellow Unitholder, As Chairman of Babcock & Brown Japan Property Management Limited (“BBJPML”), the Responsible Entity (“Responsible Entity”) of the Babcock & Brown Japan Property Trust (“BJT”), I am extremely pleased to report that this is the third consecutive year in which BJT has delivered a strong operating result. The Managing Director’s Report and Review of Results and Operations provide an overview of the activities and factors which have contributed to this result.

STRATEGY In April 2005, BJT became the first Australian listed property trust (“LPT”) with a strategy to invest solely in the real estate market of Japan, the world’s second largest economy.

More than three years on, the Board remains confident in BJT’s ability to deliver on its core strategy of generating sustainable earnings growth for Unitholders through active asset management and prudent capital management. The fundamentals of the Japanese property market remain sound relative to the major property markets of the world. Low vacancy levels, modest rental growth and rising land values characterise the Central and Greater Tokyo submarkets in particular. Property yields still also significantly exceed the cost of debt, by a margin of around 3%, exceeding that of the US, UK, Australian and major European markets.

VALUATION POLICY I feel it is appropriate to reiterate BJT’s valuation policy, at a time when it is apparent that property valuations around the world are under pressure due to the global credit crisis. Indeed, a marginal (less than 1%) devaluation of BJT’s portfolio occurred in the revaluations for the year ended 30 June 2008.

It is important that existing and potential investors understand the methodology and rigour applied to determining and reporting on the fair value of BJT’s property portfolio.

The fair value of each property is assessed semi annually. To assess fair value BJT (i) obtains an independent valuation update for each property every six months, and (ii) obtains an independent valuation report at least once every three years. Properties are revalued where the fair value differs to the carrying value by more than 5% of the individual property carrying value or more than 5% of BJT’s consolidated annual operating profit before withholding tax.

I hope Unitholders take comfort from this clarification that the book value of BJT’s portfolio is indeed current and reflects regular testing against market values in accordance with the above principles.

CAPITAL MANAGEMENT Several alternative sources of funding have been introduced for BJT this year. A Distribution Reinvestment Plan (“DRP”) was implemented for the distribution for the six months ended 31 December 2007 to raise additional capital to assist in repaying a $35 million debt facility in February 2008 as well as provide a service to unitholders who would rather reinvest their distributions to acquire additional BJT units with no commissions or stamp duty payable. A Unit Purchase Plan (“UPP”) was also implemented for the first time, allowing retail investors to participate (under the same terms as those offered to institutional investors) in the capital raising for the acquisition of properties in August 2007.

CORPORATE GOVERNANCE The Board firmly believes that strong corporate governance can contribute to the performance of a business, creating Unitholder value and fostering the confidence of the investment community. The Corporate Governance Statement on pages 33 to 45 sets out the framework by which the Responsible Entity endeavours to conform with the Australian Securities Exchange Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations.

As has been the case since listing, the Chairman of the Board and all of the members of the Audit, Risk and Compliance Committee (“ARCC”) are Independent Non-Executive Directors.

2

OUTLOOK FOR 2009 AND BEYOND With no short-term financing risk, a well located, diversified property portfolio and an experienced asset management team in Tokyo, BJT remains well positioned to capitalise on future opportunities as they arise.

We continue to believe that the underlying Japanese property market fundamentals are sound. While volatility in global credit markets has seen a reduction in transaction activity leading to a modest softening in cap rates, we do not anticipate a significant cap rate softening in Japan given the substantial spread which already exists between cap rates and the risk free rate.

While my fellow Board members and I are disappointed with the price performance of BJT over the last twelve months, we remain focused on delivering Unitholder value. We believe BJT is well placed to continue to deliver consistent operating results and we are committed to ensuring this performance is appreciated by the market and reflected in our trading price.

On a final note, the Board notes Phil Green’s formal resignation from the Board of BBJPML. On behalf of my fellow Board members. I would like to personally thank Phil for his contribution and service to the Board of BBJPML. Since listing in April 2005, Phil’s efforts have been invaluable in helping to build and grow BJT. Thank you for your continued support.

Ginza Dowa

Babcock & Brown Japan Property Trust Annual Report 2008 – Chairman’s Report

ALLAN MCDONALD Chairman

3

Managing Director’s Report Dear fellow Unitholder, The 2008 financial year has seen another strong operating result for BJT Unitholders. The distribution for the year ended 30 June 2008 of 13.05¢ per unit was 10% higher than the distribution for the previous financial year. Also pleasing was the further strengthening of the NTA per unit to $1.39, 15% higher than at 30 June 2007.

TRUST PERFORMANCE HIGHLIGHTS BJT achieved a net operating profit after tax of $68.9 million for the year ended 30 June 2008. This was 22% ahead of the net operating profit after tax for the previous financial year. As a result of this strong performance, a final distribution per unit (“DPU”) of 6.72¢ was declared, taking the full year DPU to 13.05¢ (2007: 11.90¢).

Three properties were sold during the year from the BJT portfolio including: • The Sun building, a Central Tokyo office and retail property, sold in March 2008 for ¥6.2 billion (A$68.1 million), at a 70% premium to book value; • Sapporo Nishioka, a single tenant retail property south east of central Sapporo, sold in March 2008 for ¥5.3 billion (A$55.5 million), at a 35% premium to book value; and • Showa Yakubo, an office building in Central Tokyo, sold in September 2007 for ¥0.9 billion (A$9.3 million), at a 25% premium to book value.

The disposals returned net cash of ¥5.3 billion (A$54.8 million) to BJT. Twenty-one BJT properties were revalued during the year (16 up, 5 down), resulting in a net increase in the value of these properties by ¥7.4 billion (approximately A$72.9 million), or 4.5% of current book value.

While five of the properties did experience devaluation, resulting from a combination of changes in actual and assumed market rents and cap rates, the overall strength and stability of the cashflows has supported valuations for the majority of the portfolio properties.

The net tangible asset backing (“NTA”) per Unit increased to $1.39 at 30 June 2008, from $1.21 at 30 June 2007. The NTA benefitted from the property revaluations during the year and cash released following the sale of three properties.

A disappointing aspect this year however was the decline in the BJT unit price. Obviously the investment market’s valuation of BJT, as reflected in the trading price of units, is beyond the direct control of the BJT management team. It is clear that the decline in unit price does not reflect the operating performance of BJT during this period.

4

GEARING AND REFINANCING The only debt maturing before March 2010 is A$56.6 million drawn from the ANZ Banking Group Ltd (6% of total debt) which is due to be repaid or refinanced in December 2008. BJT has cash reserves in excess of this debt repayment.

BJT’s gearing ratio net of available cash (interest-bearing debt less Australian surplus cash/property value) was 55.7% at 30 June 2008. The strength of the underlying cash flows in the business is demonstrated by BJT’s interest cover ratio (representing net operating profit before tax/borrowing costs) which at 4.2 times is above the average for the LPT sector.

At 30 June 2008, 69% of BJT’s debt was hedged to a fixed rate of interest with the weighted average term of interest rate hedges being 3.6 years. The weighted average cost of debt was 1.99%.

The following chart illustrates BJT’s debt maturity profile. debt maturity profile ¥ BILLION

30,000

20,000

18.8

18.6 15.5

14.9

10,000 5.7

0 Jun 08 Dec 08 Jun 09 Dec 09

Jun 10

Dec 10

Jun 11

Dec 11

Jun 12

Dec 12

Jun 13

ACTIVE ASSET AND CAPITAL MANAGEMENT As mentioned above, during the year three properties were sold from the BJT portfolio at significant premiums to book value. The net cash of A$54.8 million (¥5.3 billion) returned to BJT from these disposals has provided further flexibility to our capital management options.

In November 2007, BJT announced that it intended to undertake an on-market buy-back of up to 10% of BJT’s minimum number of units on issue in the previous 12 months. To date, BJT has acquired 20.8 million BJT units, representing 4.1% of the capital on issue at 30 June 2008 at an average price of A$1.06 (well below NTA).

BJT has also activated a DRP this year. Proceeds from the December 2007 DRP were used to repay a A$35 million short-term facility in February 2008. The June 2008 DRP had a zero discount and the units were acquired on-market.

Babcock & Brown Japan Property Trust Annual Report 2008 – Managing Director’s Report

24.5

5

Managing Director’s Report GROWTH IN ASSET VALUE Eight properties were acquired during the year, sourced off-market by the Tokyo based Babcock & Brown acquisition team. The experience and extensive network of this team continues to provide BJT with a strong competitive position, enabling BJT to identify and make acquisitions of high quality assets.

These newly acquired properties (3 retail; 3 office; 2 residential) had a combined purchase price of ¥45.3 billion (approximately A$470 million) and further improved the geographic and tenant diversity of the portfolio.

The properties acquired are consistent with our investment philosophy of acquiring well-located properties at attractive prices and are profiled individually on pages 24 to 31 of this annual report.

BJT increased the percentage of office assets during the year to 51% at June 2008 (2007: 43%) and further diversified the portfolio outside of Central and Greater Tokyo to Osaka and other regional areas.

Asset class diversification (by value)

51% Office 41% Retail 8% Residential

Geographic diversification (by value)

36% 33% 20% 4% 2% 2% 2% 1%

Greater Tokyo Central Tokyo Greater Osaka Hokkaido Okinawa Fukuoka Shizuoka Aichi

CAPITAL HEDGE MONETISATION At 30 June 2008 cross-currency swaps extending to 2014 were in place, to hedge approximately 39.0% of BJT’s net investment in Japanese assets. The purpose of these capital hedges is to protect against adverse currency fluctuations over a period of time. During the life of the capital hedge, BJT receives capital hedge income equal to the spread between Australian and Japanese interest rates. In early August 2008, BJT announced the monetisation of all pre-existing capital hedges and the resetting of a portion of these hedges representing 20.4% of the net investment in Japanese assets. This was undertaken as the pre‑existing hedges were significantly in-the-money and monetisation provided an opportunity for BJT to realise approximately A$19 million in cash which may be used for a number of future capital management initiatives.

The new capital hedges are at the bottom end of BJT’s 20% - 40% capital hedge range, although the level of hedges may be increased over time.

6

OUTLOOK BJT remains in a strong financial position in one of the more attractive major real estate markets globally.

We are optimistic that the combination of a strong balance sheet and an experienced asset management team will position us well to continue to execute our strategy of driving Unitholder value and to capitalise on opportunities which may arise in the short to medium term.

Thank you once again for your support.

Motomachi

Babcock & Brown Japan Property Trust Annual Report 2008 – Managing Director’s Report

ERIC LUCAS Managing Director

7

Review of Results and Operations The following review of results and operations is based on a comparison between actual results for the year ended 30 June 2008 and the previous financial year.

Year ended

Net property income

30 June 2008

30 June 2007

$100.0 m

$75.7 m

+$24.3 m (32%)

Net operating profit Distribution

Variance

$68.9 m

$56.2 m

+$12.7 m (22%)

13.05 cpu

11.90 cpu

+1.15 cpu (10%)

$1.39

$1.21

+$0.18 (15%)

NTA per Unit

Net property income of $100.0 million for the year ended 30 June 2008 was higher than net property income for the prior year primarily due to eight property acquisitions and rental growth.

The net operating profit of $68.9 million for the year ended 30 June 2008 was higher than the prior year due to higher net property income from the portfolio.

RECONCILIATION BETWEEN ACCOUNTING PROFIT, OPERATING PROFIT AND CASH DISTRIBUTION The difference between net AIFRS accounting profit and the operating profit is due to a large number of property and non-property related items which are detailed below: Year ended 30 June 2008 $’000

Year ended 30 June 2007 $’000

Accounting net profit

123,125

129,775

Additional cash from distribution hedge

13,699

7,719

9,105

–

(62,846)

(20,626)

Adjustments – non-operating items included in accounting profit Performance fees Fair value adjustments to investment properties (including associate) Deferred tax expenses Fair value derivatives Net foreign exchange (gain)/loss (Gain)/loss on disposal of investment properties Other Net operating profit Adjustments – other items Amortisation of upfront acquisition/borrowing costs TMK accounting versus cash difference Fixed asset tax expense (cash expense capitalised for accounting purposes for initial portfolio) Other – additional cash to rank units equally Other Cash distribution Cash distribution 1H Cash distribution (CPU) 1H Cash distribution 2H 8

Cash distribution (CPU) 2H

14,598

4,669

6,913

(70,795)

(3,707)

1,039

(33,045)

4,432

1,049

–

68,891

56,213

1,963

2,120

–

(949)

775

617

–

1,048

(4,021)

(115)

67,608

58,934

33,193

28,609

6.33

5.75

34,415

30,325

6.72

6.15

RENTAL GROWTH Total portfolio occupancy by income remained strong at 97.6% (97.4% at 30 June 2007).

The asset management team has maintained its focus on achieving sustainable rental growth from the portfolio through a process of rental negotiations with tenants. The following table summarises the rental growth that has been generated across the portfolio during the year ended 30 June 2008.

No. of leases

% of portfolio rent + CAM

% increase in rent + CAM

On renewal of lease

31

12.5%

8.8%

1.1%

New leases1

32

2.9%

11.1%

0.3%

During lease term

37

9.7%

6.7%2

0.7%

11

1.8%

Timing of rental negotiation

Currently in progress

% increase in portfolio rent + CAM

Under negotiation

–

1 Includes leases with rental increases and decreases.

2 80% of increase has taken effect, remainder to take effect by October 2008.

PROPERTY PORTFOLIO At 30 June 2008, the total value of BJT’s portfolio was A$1.6 billion (¥165.6 billion), 37% higher than at 30 June 2007. BJT held interests in 44 properties in Japan: 21 office, 18 retail and 5 residential, located primarily in the central and greater Tokyo area.

During the year three properties, with a combined book value of A$89.0 million (¥8.3 billion), were sold at an average 50% premium to book value, returning net cash of A$54.8 million (¥5.3 billion) to BJT. Some of this cash has been used to fund the accretive buy-back of units and the remaining balance placed on deposit earning Australian interest rates.

BJT completed the acquisition of interests in eight properties across the office, retail and residential asset classes for a combined purchase price of A$470 million (¥45.3 billion).

BJT’s interests in 21 properties were revalued (16 positive, 5 negative) during the financial year, resulting in a net portfolio increase of A$72.9 million (¥7.4 billion) or 4.5% of current portfolio value. All properties undergo an independent review semi-annually and only those properties for which fair value has moved significantly are revalued.

BORROWINGS BJT’s share of total borrowings at 30 June 2008 was A$963 million (¥98.0 billion) with an average debt maturity of 3.1 years. The only debt maturing prior to March 2010 is A$56.5 million (6% of total debt) due to be repaid in December 2008. BJT has cash reserves in excess of this amount available to repay the facility in the event it is not refinanced.

The gearing net of cash (interest bearing debt less Australian surplus cash/investment property) was 55.7% at 30 June 2008 and reduced to 54.3% post the monetisation of capital hedges in August 2008 which released approximately $19 million net cash.

Interest rate risk is managed through fixed debt or interest rate swaps and at 30 June 2008 69% of borrowings are fixed for a term of 3.6 years. BJT’s weighted average cost of debt is 1.99% and has an interest cover ratio of 4.2 times which comfortably supports BJT’s gearing levels.

Babcock & Brown Japan Property Trust Annual Report 2008 – Review of Results and Operations

The active asset management of the portfolio has resulted in significantly stronger yields on acquisition price. The portfolio current net operating income (“NOI”) yield on purchase price is 5.5%, up from the acquisition NOI yield of 5.2%. The current NOI yield on current book value is 4.9%, reflecting the increase in the portfolio value since acquisitions.

9

Senior Management ERIC LUCAS Managing Director Eric joined Babcock & Brown in 1987 and in July 2006 was appointed the Global Head of Real Estate. Prior to joining Babcock & Brown, Eric worked at the international law firm of Anderson Mori and Rabinowitz in Tokyo.

In 1987, he joined Babcock & Brown’s Japanese joint venture, Nomura Babcock & Brown, where he worked until 1992. After several years in the San Francisco office of Babcock & Brown, Eric returned to Tokyo in 1998 to establish Babcock & Brown’s Japan office. Eric holds a law degree from the University of Melbourne in Australia.

NAOTO ICHIKI Chief Operating Officer Mr Ichiki joined Babcock & Brown in 2006. Prior to joining Babcock & Brown, Mr Ichiki was a Managing Director of JPMorgan, where he was responsible for Real Estate Structured Finance Asia, Real Estate Investment Banking Japan, and Structured Products Japan. Before this he was a management consultant at McKinsey & Company.

Mr Ichiki holds a Bachelor of Law degree from Hitotsubashi University and is a licensed real estate broker.

SHINYA SATO Head of Acquisitions Mr Sato joined Babcock & Brown in 1999. He holds a Bachelor of Law degree from the University of Hokkaido.

Prior to joining Babcock & Brown, Mr Sato was a Managing Director of Jones Lang LaSalle K.K. in Japan, providing a wide variety of real estate services to clients in Japan and throughout the world. Mr Sato is a licensed real estate broker and a registered real estate consultant in Japan.

NAOTO YABU Head of Asset Management Mr Yabu joined Babcock & Brown in 2006. Prior to joining Babcock & Brown, Mr Yabu was a managing director of Orix Asset Management Corporation, a licensed manager of ORIX JREIT, leading its IPO. Following this, he was a Managing Director of two private funds management companies heading up their real estate asset management groups in Japan. Mr Yabu holds a Bachelor of Science degree from Kobe University and is a licensed real estate broker.

Babcock & Brown Group

Babcock & Brown Japan Property Trust

Responsible Entity

Corporate

Acquisitions

Managing Director Company Secretary General Counsel Finance Investor Relations

Asset Management

Chief Operating Officer Naoto Ichiki

Chief Compliance Officer Hitoshi Kamikubo

Acquisition team of 11 professionals headed by Shinya Sato 10

Japan Manager

Asset management team of 10 professionals headed

by Naoto Yabu

Accounting and administration team of 7 professionals headed by Sachi Ogino

Eric Lucas Managing Director

From top: Eric Lucas, Naoto Ichiki, Shinya Sato, Naoto Yabu

Babcock & Brown Japan Property Trust Annual Report 2008 – Senior Management

“The experience and extensive network of the BJT senior management team continues to provide BJT with a strong competitive position.”

11

Acquisitions & Asset Management Babcock & Brown has been operating in the Japanese property market since 1998 and has built a strong team of 34 professionals and staff from many disciplines including real estate appraisal, engineering and financial modelling with experience across all asset classes.

ACqUISITIONS TEAM Our Acquisitions team comprises eleven professionals, led by five highly experienced directors. The Acquisitions team utilises an extensive network of contacts and experience to identify and execute accretive acquisitions on behalf of BJT. The Acquisitions team has successfully grown the BJT portfolio by 32 properties since IPO, increasing the value of the portfolio by 252% to ¥165.6 billion. The majority of these properties acquired have been sourced “off-market”, leveraging the relationships of the Acquisitions team, allowing BJT to benefit from avoiding competitive bidding situations.

ASSET MANAGEMENT TEAM Our Asset Management team, now comprising ten professionals, is responsible for managing the asset portfolio. The Asset Management team also assists the Acquisitions team in delivering the cash flow forecasts and valuations from the due diligence process. The Asset Management team also assesses hold versus sale opportunities for properties. Such analysis has resulted in, for example, the recent sales of the Sun and Sapporo Nishioka properties at significant premiums to book value.

The Asset Management team also focuses on strategic issues such as ensuring properties are positioned to suit the needs of tenants, targeting rental adjustments to optimise the balance between tenant retention and income growth and managing capital expenditure which will improve the value of properties and attract/retain tenants. For example, recent refurbishment works of Kawasaki Dice’s entrance facade and restaurant floor were implemented recently to refresh the image of the property.

“The Osaka No. 3 and No. 4 office properties were the first properties we acquired in Osaka. We believe they offer BJT stability of income through geographic diversification of the portfolio.”

Chiaki Matsumoto, Asset Manager of Osaka No. 3 and No. 4 12

“The Sun building is an excellent demonstration of our ability to bring optimal returns to our investors by improving property values through rental increases, and finding the most favourable exit timing through our extensive relationship network across the market.”

Chihiro Hara, Asset Manager of Sun building

“The current high levels of occupancy and rental increases demonstrate our ability to balance tenant relationships and increases in rental income. These will be the key factors for the portfolio’s sustainable internal growth.”

“Leasing of retail is very relationship oriented. My long-term relationships with the major retail players ensure we can secure leases across BJT’s retail asset portfolio.”

Satoru Oishi, Retail Leasing Specialist, Asset Management

Babcock & Brown Japan Property Trust Annual Report 2008 –– acquisitions & asset Management

Naoto Yabu, Head of Asset Management

13

harajuku bell pier

Portfolio Overview Retail

Office

Residential

Portfolio

18

21

5

44

67.3

85.0

13.4

165.6

170,388

85,332

28,330

284,050

Occupancy by income

99.4%

95.9%

99.9%

97.6%

Occupancy by area

99.7%

93.8%

99.9%

98.0%

115

314

74

503

– Cancellable

76

311

71

458

– Non-cancellable

39

3

3

45

Number of properties Carrying value (¥b) Net rentable area (sqm)

Number of leases – Total

50% Office 42% Retail 8% Residential

Lease diversification (by income)

63% Cancellable 37% Non-cancellable

63% Cancellable 37% Non-cancellable

Babcock & Brown Japan Property Trust Annual Report 2008 – Portfolio Overview

Asset class diversification (by income)

15

Portfolio Overview Property

Location

Completed

RETAIL 1

Kawasaki Dice

Kanagawa prefecture – Kawasaki

Aug 2003

2

Konan Home Centre

Chiba prefecture – Ichikawa

Mar 2005

3

Shinjuku Fuji

Central Tokyo – Shinjuku ward, Nishi Shinjuku

4

Mukomachi Saty

Kyoto prefecture – Muko

Jun 1964 Sep 1970/Nov 1981/Apr 1997

5

Ginowan

Okinawa prefecture – Ginowan

Jan 2001

6

Shibuya Konami

Central Tokyo – Shibuya ward, Shinsencho

May 1990

7

Motomachi

Kanagawa prefecture – Yokohama

Jun 1992

8

Susono

Shizuoka prefecture – Susono

Jun 1994

9

Matsudo Nitori

Chiba prefecture – Matsudo

Sep 2004

10

Harajuku Bell Pier

Central Tokyo – Shibuya ward, Jingumae

Jan 2004

11

Yoshikawa

Saitama prefecture – Yoshikawa

12

Tsudanuma

Chiba prefecture – Narashino

Feb 1976

13

Sapporo Co-op

Hokkaido prefecture – Kitahiroshima

Apr 1992

14

Sapporo Ai

Hokkaido prefecture – Sapporo

Oct 1989

15

Sapporo Toys ‘R’ Us

Hokkaido prefecture – Sapporo

Oct 1993/Jan 1996

16

Round One Amagasaki

Hyogo prefecture – Amagasaki

Sep 1998

17

Round One Nara

Nara prefecture – Nara

18

Kajicho Ekimae

Central Tokyo – Chiyoda ward, Kajicho

Retail sub-total/average

Oct 1992

Jul 1998 Nov 2002 Jun 1995

OFFICE 19

Shinjuku Sanei

Central Tokyo – Shinjuku ward, Nishi Shinjuku

20

Osaka No.4

Osaka prefecture – Osaka

21

JN

Kanagawa prefecture – Yokohama

Sep 2007

22

Ginza Dowa

Central Tokyo – Chuo ward, Ginza

Sep 1974

23

Kokusai Nihombashi

Central Tokyo – Chuo ward, Nihombashi Kayabacho

Jul 1987

24

Osaka No.3

Osaka prefecture – Osaka

Sep 1979

25

Higashi Totsuka

Kanagawa prefecture – Yokohama

Feb 1993

26

Yamashitacho

Kanagawa prefecture – Yokohama

Oct 1991

27

Forest Kita Aoyama

Central Tokyo – Minato ward, Kita Aoyama

Apr 1991

Dec 1979 Aug 1981

28

Sun Ace Tokugawa

Aichi prefecture – Nagoya

29

Takadanobaba

Central Tokyo – Shinjuku ward, Takadanobaba

Mar 1986

30

Prime Kanda

Central Tokyo – Chiyoda ward, Kanda Sudacho

Aug 1990

Mar 1990

31

OS Tsukiji

Central Tokyo – Chuo ward, Tsukiji

32

Asakusa

Tokyo – Taito ward, Komagata

Sep 2004

33

Shiba Daimon

Central Tokyo – Minato ward, Shiba Daimon

Mar 1994

34

Prime Tsukiji

Central Tokyo – Chuo ward, Tsukiji

Aug 1992

Jul 1982

35

Daikanyama Takara

Tokyo – Meguro ward, Kami Meguro

Apr 1991

36

Yotsuya KD

Central Tokyo – Shinjuku ward, Yotsuya

Feb 1990

37

Akabane

Tokyo – Kita ward, Akabane

Jun 1993

38

FT Nihombashi

Central Tokyo – Chuo ward, Nihombashi Hisamatsucho

Oct 1988

39

Sun No. 5

Central Tokyo – Chuo ward, Nihombashi Muromachi

May 1983

Office sub-total/average

Mar 1987

RESIDENTIAL 40

Tosabori

Osaka prefecture – Osaka

Sep 2007

41

Sekijomachi

Fukuoka prefecture – Fukuoka

Mar 2007

42

G-Clef Kamata

Tokyo – Ota ward, Nishi Kamata

Jan 1992

43

Prime Stay Tsukiji

Central Tokyo – Chuo ward, Tsukiji

Jun 1986

44

Nishi Kasai

Tokyo – Edogawa ward, Nishi Kasai

Residential sub-total/average Total/average 16

Note: Individual columns may not sum to totals due to rounding.

Nov 1990 Feb 2003 Nov 1991

Trust share of net rentable area (sqm)

Trust share of net rentable area (tsubo)

Occupancy by area Jun 07 Jun 08

Occupancy by income Jun 07 Jun 08

14.2

8.6%

12,084

3,655

99.2%

99.2%

98.9%

12.1

7.3%

48,819

14,768

100%

100%

100%

99.2% 100%

5.2

3.1%

1,476

447

100%

94.2%

100%

97.2%

5.0

3.0%

22,528

6,815

100%

100%

100%

100%

3.3

2.0%

10,843

3,280

100%

99.4%

100%

99.5%

2.7

1.6%

4,993

1,510

100%

100%

100%

100%

2.7

1.6%

1,585

480

100%

100%

100%

100%

2.6

1.6%

12,127

3,668

100%

100%

100%

100%

2.4

1.5%

8,946

2,706

100%

100%

100%

100%

2.4

1.4%

766

232

100%

100%

100%

100%

2.3

1.4%

11,504

3,480

100%

100%

100%

100%

2.3

1.4%

1,840

557

81.8%

100%

68.5%

100%

2.2

1.3%

12,208

3,693

100%

100%

100%

100%

2.1

1.2%

3,209

971

N/A

100%

N/A

100%

1.9

1.2%

6,163

1,865

100%

100%

100%

100%

1.6

1.0%

5,256

1,590

N/A

100%

N/A

100%

1.2

0.7%

5,157

1,560

N/A

100%

N/A

100%

1.1

0.7%

884

267

100%

78.9%

100%

83.4%

67.3

40.6%

170,388

51,544

99.8%

99.7%

98.7%

99.4%

14.2

8.6%

8,141

2,463

99.3%

99.4%

99.8%

99.8%

12.1

7.3%

13,625

4,121

N/A

98.8%

N/A

98.9%

12.0

7.2%

10,083

3,050

N/A

100%

N/A

100%

10.3

6.2%

6,350

1,921

98.1%

99.9%

96.4%

99.9%

6.5

3.9%

4,398

1,331

100%

100%

100%

100%

6.0

3.6%

8,387

2,537

N/A

91.8%

N/A

92.1%

3.7

2.2%

5,671

1,716

90.5%

87.4%

91.2%

89.1%

3.0

1.8%

5,498

1,664

100%

76.7%

100%

78.7%

2.2

1.4%

992

300

100%

100%

100%

100%

2.1

1.3%

6,235

1,886

77.1%

73.4%

78.4%

74.6%

1.9

1.1%

2,553

772

100%

100%

100%

100%

1.8

1.1%

1,680

508

100%

71.4%

100%

70.4%

1.7

1.1%

2,143

648

90.9%

86.5%

90.9%

86.3%

1.4

0.8%

2,047

619

100%

100%

100%

100%

1.1

0.7%

969

293

100%

100%

100%

100%

1.1

0.7%

1,330

402

100%

100%

100%

100%

0.9

0.5%

959

290

100%

100%

100%

100%

0.8

0.5%

1,200

363

86.8%

100%

86.4%

100%

0.8

0.5%

1,084

328

87.3%

100%

87.8%

100%

0.7

0.4%

1,182

358

83.3%

100%

82.0%

100%

0.5

0.3%

805

244

100%

100%

100%

100%

85.0

51.3%

85,332

25,815

94.1%

93.8%

95.7%

95.9%

100%

7.1

4.3%

11,549

3,494

N/A

100%

N/A

2.8

1.7%

10,755

3,253

N/A

100%

N/A

100%

1.9

1.1%

3,310

1,001

100%

100%

100%

100% 98.6%

0.9

0.5%

1,226

370

100%

98.6%

100%

0.7

0.4%

1,490

451

100%

100%

100%

100%

13.4

8.1%

28,330

8,569

100.0%

99.9%

100.0%

99.9%

165.6

100.0%

284,050

85,928

98.5%

98.0%

97.4%

97.6%

Babcock & Brown Japan Property Trust Annual Report 2008 – Portfolio Overview

Carrying value Jun 08 % of ¥ billions portfolio

17

Top 20 Tenant Profile Top 20 Tenants (by income) 30 June 2008

Tenant name

Property

Industry

1

Toyota Tsusho Corporation/Konan Shoji

Konan Home Centre

Trading/Retail

2

Aki

Tosabori

Real Estate

3

Japan Securities Agents

Kokusai Nihombashi

Securities Administration

4

Mycal

Mukomachi Saty

Retail

5

Sakuraya

Kawasaki Dice

Retail

6

Kyodo PR

Ginza Dowa

Advertising

7

Matahari

Kawasaki Dice

Entertainment

8

Gaia

Shinjuku Fuji

Entertainment

9

Co-op Sapporo

Sapporo Co-op

Retail

10

Jikei Space

Sekijomachi

School

11

NTT Advanced Technology

Higashi Totsuka

Systems Solutions

12

Konami Sports & Life

Shibuya Konami

Fitness Club

13

City of Yokohama

JN

Government

14

Nitori

Matsudo Nitori

Retail

15

Gourmet City Kanto

Susono

Retail

16

Jonan Kensetsu

JN

Housing

17

NHK Culture Centre

Osaka No.4

Education

18

Fuji Soft

JN

Systems Solutions

19

Kanehide Shoji

Ginowan

Retail

20

Daiwa Jitsugyo

Ginza Dowa

Entertainment

Total 1 2 3 4 5

The property is 100% leased to Konan Shoji on a 20 year lease. For the first 12 years (until March 2017) the master lessee under a non-cancellable Fixed Term Lease is Toyota Tsusho Corporation pursuant to which Toyota Tsusho subleases to Konan Shoji.

A 7 year lease. The lease is non-cancellable during the term (until December 2014).

A 16 year lease. The lease is non-cancellable for the initial seven years (until June 2011).

A 10 year lease. The lease is non-cancellable during the term (until August 2013).

A 20 year lease. The lease is non-cancellable for the initial ten years (until August 2013).

Opposite: Kokusai Mihombashi. Below: Konan Home Centre

18

Lease expiry date

Remaining term (years)

Fixed non-cancellable1

5.9%

March 2025

16.8

Fixed non-cancellable2

4.0%

December 2014

6.5

Standard

3.8%

March 2009

–

Standard non-cancellable3

3.4%

June 2020

11.9

Standard non-cancellable4

2.4%

August 2013

5.2

2.1%

February 2009

–

Standard non-cancellable5

2.0%

August 2023

15.2

Fixed non-cancellable6

2.0%

July 2020

12.0

Standard non-cancellable

1.9%

November 2012

4.4

Standard8

1.8%

March 2022

13.8

Standard

1.7%

January 2010

–

Standard

1.6%

February 2009

–

Standard

1.6%

March 2009

–

Standard non-cancellable9

1.5%

September 2024

16.3

Standard non-cancellable10

1.5%

June 2014

6.0

Fixed non-cancellable11

1.4%

December 2009

1.5

Standard

1.4%

March 2010

–

Standard

1.3%

September 2009

–

Standard

1.3%

Standard

1.1%

Lease type

Standard

7

January 201612 January 2009

43.7% 6 7 8 9 10 11 12

A 15 year lease. The lease is non-cancellable for the initial seven years (until July 2012).

A 10 year lease. The lease is non-cancellable during the term (until November 2012).

Cancellable only when the lessor agrees and lessee forfeits the tenant deposit.

A 20 year lease. The lease is non-cancellable during the term (until September 2024).

A 20 year lease. The lease is non-cancellable during the term (until June 2014).

A 2 year lease. The lease is non-cancellable during the term (until December 2009).

The tenant has provided a cancellation notice and will vacate in November 2008.

– –

Babcock & Brown Japan Property Trust Annual Report 2008 – Top 20 Tenant Profile

% of Trust’s Total Gross Passing Rent plus CAM

19

Ginza

21

Property Information

Babcock & Brown Japan Property Trust Annual Report 2008 – Managing Director’s Report

Property Locations

Ueno 29

SHINJUKU-KU SHINJUKU 3

30

36

19

18

CHIYODA-KU

Yotsuya

38

39 23

TOKYO

CHUO-KU SHIBUYA-KU 22

Shimbashi

27

Roppongi

SHIBUYA 6

34 31

43

CENTRAL TOKYO

10

33

Hamamatsucho

MINATO-KU

Tokyo Bay

Shinagawa

Key

greater Tokyo

central tokyo 3

Shinjuku Fuji

30

Prime Kanda

1

Kawasaki Dice

26

Yamashitacho

6

Shibuya Konami

31

OS Tsukiji

2

Konan Home Centre

32

Asakusa

10

Harajuku Bell Pier

33

Shiba Daimon

7

Motomachi

35

Daikanyama Takara

18

Kajicho Ekimae

34

Prime Tsukiji

9

Matsudo Nitori

37

Akabane

19

Shinjuku Sanei

36

Yotsuya KD

11

Yoshikawa

42

G-Clef Kamata

22

Ginza Dowa

38

FT Nihombashi

12

Tsudanuma

44

Nishi Kasai

23

Kokusai Nihombashi

39

Sun No. 5

21

JN

27

Forest Kita Aoyama

43

Prime Stay Tsukiji

25

Higashi Totsuka

29

Takadanobaba

GREATER OSAKA AND JAPAN

22

17

Round One Nara

Ginowan

20

Osaka No.4

Susono

24

Osaka No.3

4

Mukomachi Saty

5 8 13

Sapporo Co-op

28

Sun Ace Tokugawa

14

Sapporo Ai

40

Tosabori

15

Sapporo Toys‘R’Us

41

Sekijomachi

16

Round One Amagasaki

Retail Property Office Property Residential Property

Express Way Main Road JR Line Subway Shinkansen

11

SAITAMA

TOKYO 37

9

CHIBA

Ikebukuro

Shinjuku

32

Akihabara

2

12

Tokyo

20km

44

Shibuya 35

Shinagawa

Chiba

Tokyo Bay

1

To ky ow an

Aq u

GREATER TOKYO

Kawasaki

KANAGAWA

aL

Yokohama

ine

21 26 25

7

HOKKAIDO 15 14 13

TOTTORI

Babcock & Brown Japan Property Trust Annual Report 2008 – Property Locations

42

Proposed Shinkansen Line

KYOTO

Japan Sea

NAGOYA

HYOGO

FUKUOKA

SHIGA

KYOTO 4

Sh

ink ans en

16

OSAKA 40

41

20 24

KOBE

NARA 17

OSAKA

Pacific Ocean

NARA WAKAYAMA

WAKAYAMA

OKINAWA 5

JAPAN 20 km

TOKUSHIMA

20km

GREATER OSAKA

TOKYO 8 TAKASAGO 28 AICHI OSAKA

23

New Properties Osaka No.4 Key Property Statistics (30 June 2008) Property Statistics

Summary Ownership interest

1

Purchase date Carrying value (billion) Completed PML

100% Sep 2007 ¥12.1 Aug 1981 5.47%

Land area (square metres) Trust’s share NRA (tsubo) Trust’s share NRA (square metres)

1,244 4,121 13,625

Occupancy by area

99%

Occupancy by income

99%

Tenancy Profile Tenant name

Type of lease

% of total rent

NHK Culture Center

Standard

16.1%

Sumitomo Life Insurance

Standard

6.5%

NTT WEST – Kansai

Standard

6.3%

Xymax Axis

Standard

6.3%

NJES

Standard

4.4%

Other – 45 tenants 1

60.4%

BJT’s interest in this property comprises a condominium interest in eight floors (7, 8, 18 and 21 to 25). BJT’s interest is the largest individual lot in the condominium association.

JN Key Property Statistics (30 June 2008) Property Statistics

Summary Ownership interest Purchase date Carrying value (billion) Completed PML

100% Dec 2007 ¥12.0 Sep 2007 7.54%

Land area (square metres) Trust’s share NRA (tsubo) Trust’s share NRA (square metres)

1,687 3,050 10,083

Occupancy by area

100%

Occupancy by income

100%

Tenancy Profile Tenant name

Type of lease

City of Yokohama

Standard

25.9%

Jonan Kensetsu

Fixed non-cancellable

23.2%

Fuji Soft

Standard

22.0%

Bab Hitachi

Standard

13.7%

Usen

Standard

7.8%

1

Other – 1 tenant 1

24

% of total rent

A 2 year lease. The lease is non-cancellable during the term (until December 2009).

7.4%

PROPERTY TYPE Multi-tenant office building SUB-MARKET Osaka CBD ADDRESS 1-11, Umeda, Kita-ku Osaka-shi, Osaka Approximately 80 metres (a one minute walk) from Kita-Shinchi station on JR Tozai line and approximately 400 metres (a five minute walk) from JR Osaka Station.

PROPERTY TYPE Multi-tenant office building SUB-MARKET Yokohama ADDRESS 3 Otamachi, Naka-ku Yokohama-shi, Kanagawa Approximately 400 metres (a five minute walk) from Kannai station on the JR Keihin Tohoku lines and 200 metres (a three minute walk) from Bashamichi station on the Minatomirai line.

The JN property is a brand-new 14 storey office property completed in September 2007. It faces a major road (Kannai Odori) in the central business district of Yokohama, which is approximately 30 minutes by train from central Tokyo.

Babcock & Brown Japan Property Trust Annual Report 2008 – new properties

The Property is a 25 storey building located in the centre of Osaka near JR Osaka station.

It is connected to JR Osaka and other subway stations via a recently renovated underground shopping arcade which contain a number of retail stores and restaurants.

25

New Properties Tosabori Key Property Statistics (30 June 2008) Property Statistics

Summary Ownership interest

100%

Purchase date

Dec 2007

Carrying value (billion) Completed

¥7.1 Sep 2007

PML

8.93%

Land area (square metres)

1,816

Trust’s share NRA (tsubo)

3,494

Trust’s share NRA (square metres)

11,549

Occupancy by area

100%

Occupancy by income

100%

Tenancy Profile Tenant name

Type of lease

Aki

Fixed non-cancellable

1

% of total rent 1

100.0%

A 7 year lease. The lease is non-cancellable during the term (until December 2014).

Osaka No. 3 Key Property Statistics (30 June 2008) Property Statistics

Summary Ownership interest

1

Purchase date Carrying value (billion) Completed PML

100% Sep 2007 ¥6.0 Sep 1979 3.48%

Land area (square metres)

690

Trust’s share NRA (tsubo)

2,537

Trust’s share NRA (square metres)

8,387

Occupancy by area

92%

Occupancy by income

92%

Tenancy Profile Tenant name

Type of lease

Nihon Jutaku Ryutsu

Standard

Sumitomo Life Insurance

Standard

6.3%

Novac

Standard

5.5%

Sumitomo Real Estate Sales

Standard

4.9%

Plamatels

Standard

3.7%

Other – 47 tenants

% of total rent

12.6%

67.0%

1 BJT’s interest in this property comprises a condominium interest in five floors (7, 8, 28, 30 and 31). BJT’s interest is the largest individual lot in the condominium association.

26

PROPERTY TYPE Residential building SUB-MARKET Osaka CBD ADDRESS 3-3-2, Tosabori, Nishi-ku Osaka-shi, Osaka Approximately 560 metres (a seven minute walk) from Awasa station on the Osaka subway Chuo line.

PROPERTY TYPE Multi-tenant office building SUB-MARKET Osaka CBD ADDRESS 1-1, Umeda, Kita-ku Osaka-shi, Osaka Approximately 80 metres (a one minute walk) from Kita-Shinchi station on JR Tozai line and approximately 400 metres (a five minute walk) from JR Osaka station.

The Property is a 34 storey building located immediately adjacent to Osaka Ekimae No. 4 in the centre of Osaka near JR Osaka station.

It is connected to JR Osaka and other subway stations via a recently renovated underground shopping arcade which contains a number of retail stores and restaurants.

Babcock & Brown Japan Property Trust Annual Report 2008 – new properties

A 15 storey residential building, completed in September 2007 and master-leased to a single tenant. It is located in a predominately residential area known as Tosabori within central Osaka. The building comprises 18 studio, 159 one-bedroom, 24 two-bedroom, 11 three-bedroom and 2 four-bedroom apartments.

27

New Properties Sapporo Ai Key Property Statistics (30 June 2008) Property Statistics

Summary Ownership interest Purchase date Carrying value (billion) Completed PML

100% Sep 2007 ¥2.1 Oct 1989 0.47%

Land area (square metres) Trust’s share NRA (tsubo)

610 971

Trust’s share NRA (square metres)

3,209

Occupancy by area

100%

Occupancy by income

100%

Tenancy Profile Tenant name

Type of lease

% of total rent

KN Sanko

Standard

35.3%

OCC

Standard

15.0%

Lee Pro

Standard

13.7%

Washizu

Fixed cancellable

8.1%

Marui

Standard

6.7%

Other – 6 tenants

21.2%

Sekijomachi Key Property Statistics (30 June 2008) Property Statistics

Summary Ownership interest Purchase date Carrying value (billion) Completed PML

100% Sep 2007 ¥2.8 Mar 2007 4.74%

Land area (square metres) Trust’s share NRA (tsubo) Trust’s share NRA (square metres)

3,154 3,253 10,755

Occupancy by area

100%

Occupancy by income

100%

Tenancy Profile Tenant name

Type of lease

Jikei Space

Standard

1

28

1

Cancellable only when the lessor agrees and lessee forfeits the tenant deposit.

% of total rent

100.0%

PROPERTY TYPE Multi-tenant retail building SUB-MARKET Sapporo ADDRESS 1-2, Kita-4 Nishi-2 Chuo-ku, Sapporo-shi, Hokkaido Located adjacent to Sapporo Station and linked via an underground walkway.

PROPERTY TYPE Residential building SUB-MARKET Fukuoka ADDRESS 21, Sekijomachi, Hakata-ku Fukuoka-shi, Fukuoka Approximately 850 metres (an eleven minute walk) from Chiyokenchoguchi station on the Hakozaki subway line.

Sekijomachi is a seven storey building comprising 302 one-bedroom apartments designed for student accommodation. It is located in Fukuoka, the largest city in Kyushu (the southern most island of Japan) with a population of over 1.4 million (Japan’s 8th largest city).

Babcock & Brown Japan Property Trust Annual Report 2008 – new properties

Sapporo Ai is an eight storey retail centre with three basement floors situated in the Sapporo CBD near JR Sapporo station, one of the busiest retail areas on Hokkaido Island.

29

New Properties Round One Amagasaki Key Property Statistics (30 June 2008) Property Statistics

Summary Ownership interest Purchase date Carrying value (billion) Completed PML

100% Sep 2007 ¥1.6 Sep 1998 6.60%

Land area (square metres)

3,590

Trust’s share NRA (tsubo)

1,590

Trust’s share NRA (square metres)

5,256

Occupancy by area

100%

Occupancy by income

100%

Tenancy Profile Tenant name

Type of lease

Round One

Standard non-cancellable

1

% of total rent 1

100%

A 20 year lease. The lease is non-cancellable during the term (until May 2018).

Round One Nara Key Property Statistics (30 June 2008) Property Statistics

Summary Ownership interest Purchase date Carrying value (billion) Completed PML

100% Sep 2007 ¥1.2 Jul 1998 9.95%

Land area (square metres)

2,989

Trust’s share NRA (tsubo)

1,560

Trust’s share NRA (square metres)

5,157

Occupancy by area

100%

Occupancy by income

100%

Tenancy Profile Tenant name

Type of lease

Round One

Standard non-cancellable

1

30

A 18 year lease. The lease is non-cancellable during the term (until April 2016).

% of total rent 1

100.0%

PROPERTY TYPE Single-tenant retail (amusement) SUB-MARKET Amagasaki ADDRESS 4-5-25, Nishi Namba Amagasaki-shi, Hyogo Located approximately 700 metres (a nine minute walk) from Deyashiki station on Hanshin line.

PROPERTY TYPE Single-tenant retail (amusement) SUB-MARKET Nara ADDRESS 7-1-43, Omiya Nara-shi, Nara Located approximately 640 metres (an eight minute walk) from Shin Omiya station on Kintetsu line.

Round One Nara is a single tenant retail building with six levels. It is located on Route 369 in Nara, 50 minutes by train from Osaka.

Babcock & Brown Japan Property Trust Annual Report 2008 – new properties

Round One Amagasaki is a single tenant retail building over six levels. It is located on Route 2 in Amagasaki, west of Central Osaka.

31

Osaka No.4

Corporate Governance INTRODUCTION This statement reflects Babcock & Brown Japan Property Trust’s (“BJT”) corporate governance framework as at 13 August 2008. A copy of this statement and other documents (or summaries thereof) can be accessed and downloaded from the Corporate Governance section on our website at www.bbjapanpropertytrust.com.

The BJT Board is responsible for overseeing the rights and interests of all investors and is accountable to them for the overall governance and management of BJT. The BJT Board formulates and approves the strategic direction, investment objectives and goals of BJT. The establishment of a sound framework of corporate governance and the implementation of the corresponding governance culture and processes throughout BJT is one of the primary responsibilities of the BJT Board. The BJT Board recognises it is accountable to Unitholders for the performance of BJT and, to that end, is responsible for instituting and ensuring BJT maintains a system of corporate governance that operates in the best interests of Unitholders whilst also addressing the interests of other key stakeholders.

A comprehensive corporate governance framework and good governance policies and procedures can add to the performance of BJT, the creation of Unitholder value and engender the confidence of the investment community.

The ASX Listing Rules require listed entities such as BJT to include a statement in their annual report disclosing the extent to which they have followed the eight ASX Principles and 27 ASX Recommendations during the reporting period, identifying any ASX Recommendations that have not been followed and giving reasons for that variance. BJT’s Corporate Governance Statement is structured with reference to the ASX Principles and the ASX Recommendations. Areas not fully complied with are disclosed under the relevant principle. All of the corporate governance practices referred to herein were in place for the year ended 30 June 2008 unless otherwise indicated.

In addition, the Babcock & Brown Group, as parent entity of the Responsible Entity, recognises that effective and transparent governance practices within the funds which it manages are essential to the preservation of securityholders’ and stakeholders’ interests and the continued success of those funds. To this end, Babcock & Brown Limited has established a robust corporate governance framework for the management of the Babcock & Brown specialised funds. This framework includes a number of key principles for the governance of those funds with a view to protecting the interests of each fund’s securityholders and other stakeholders. A summary of the corporate governance framework adopted by Babcock & Brown can be found on pages 109 to 111 of the Babcock & Brown Limited 2007 Annual Report.

COMPLIANCE WITH THE ASX PRINCIPLES AND RECOMMENDATIONS As at the date of this Corporate Governance Statement, the BJT Board advises that its corporate governance practices are in compliance with the ASX Principles and the ASX Recommendations, except where specifically noted in this Corporate Governance Statement.

ACHIEVEMENTS IN 2007/2008: • The BJT Board undertook a review of the BJT corporate governance framework and has revised a number of its Charters and Policies including the Securities Trading Policy.

• The BJT Board has elected to “adopt early” the ASX’s revised Corporate Governance Principles and Recommendations which took effect from 1 January 2008.

Babcock & Brown Japan Property Trust Annual Report 2008 – Corporate Governance

In August 2007 the ASX’s Corporate Governance Council issued a revised set of guidelines entitled Corporate Governance Principles and Recommendations. These guidelines articulate eight core principles (ASX Principles) that the Council believes underlie good corporate governance, together with 27 recommendations (ASX Recommendations) for implementing effective corporate governance.

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Corporate Governance (continued) ASX Principle 1: Lay solid foundations for management and oversight Companies should establish and disclose the respective roles and responsibilities of Board and management.

ROLE OF THE BJT BOARD AND MANAGEMENT ASX Recommendation 1.1: Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions.

The BJT Board has adopted a formal Board Charter which details the functions and responsibilities of the BJT Board and distinguishes such functions and responsibilities from those which have been delegated to management. A summary of the Board Charter is available in the Corporate Governance section on BJT’s website at www.bbjapanpropertytrust.com.

As outlined in the Board Charter, the BJT Board is responsible for the management, or overseeing the management, of the affairs of BJT including: • approving and monitoring the corporate strategy, financial plans and objectives of BJT; • evaluating, approving and monitoring the annual budgets and business plans; • determining BJT’s distribution policy, the operations of BJT’s distribution reinvestment plan and evaluating, approving and monitoring major capital expenditure, capital management and all major investments, divestitures and other transactions of BJT, including the issue of securities; • approving all accounting policies, financial reports and material reporting by BJT; • reviewing and evaluating the performance of the BJT Board, each Board committee, and each individual Director against the relevant charters, corporate governance policies and agreed goals and objectives; • in consultation with Babcock & Brown, appointing the Chairman and Company Secretary of BJT; • ensuring that effective audit, risk management and regulatory compliance programs are in place to protect BJT’s assets and Unitholder value and approving and monitoring BJT’s risk and audit framework; • reviewing the performance and effectiveness of BJT’s corporate governance policies and procedures; and • setting the goals and objectives for the BJT Board and its committees each year.

The Board Charter also establishes the specific powers and responsibilities of the Chairman and Managing Director. Those delegated powers are subject to the specific powers and authorities delegated to the Board committees and the following powers which are retained by the BJT Board: • contracts, commitments and capital expenditure above specified thresholds and limits determined by the BJT Board from time to time; • expenditure outside the ordinary course of business in excess of thresholds or limits specified by the BJT Board for this purpose; • major strategic decisions; • adoption of BJT’s annual budget; • approval of financial reports and accounts of BJT and the Responsible Entity which are to be lodged with any regulator, including the ASX; • the issue of any equity securities by BJT, except under a program previously approved by the Board, and • commencing or taking a significant step in major litigation.

The BJT Board has delegated a number of these responsibilities to its Audit, Risk & Compliance Committee.

The responsibilities of the Committee are detailed in Principle 2 below.

The Board Charter also includes a summary of the responsibilities of each Director.

ASX Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives.

The BJT Board has retained responsibilities relating to the review and monitoring of the performance of the BJT Board, the Chairman, the Managing Director and other individual members of the BJT Board.

The review of the performance of the Managing Director, Mr Lucas, the Non-Executive Director, Mr Green, and the BJT management team is undertaken by Babcock & Brown.

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The remuneration practices of the Babcock & Brown Group apply to the remuneration of the Managing Director, the Non-Executive Directors, and the BJT management team. Refer to commentary on this matter under Principle 8 below.

For details regarding the remuneration practices of the Babcock & Brown Group, refer to the Remuneration Report in the Annual Report 2007 of Babcock & Brown Limited. The Remuneration Report of Babcock & Brown contains details of Babcock & Brown’s remuneration philosophy and policies including other key performance conditions that are assessed in determining the total remuneration of the Managing Director, the Non-Executive Directors and the BJT management team.

ASX Principle 2: Structure the Board to add value Companies should have a Board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

STRUCTURE OF THE BOARD ASX Recommendation 2.1: A majority of the board should be Independent Directors.

The size and composition of the BJT Board is determined in accordance with the Constitution of the Responsible Entity. In addition, in accordance with the Board Charter, the BJT Board will comprise Directors with a broad range of skills, expertise and experience from a diverse range of backgrounds, and will comprise a majority of independent Directors.

The BJT Board is comprised of directors with a broad range of skills, expertise and experience from a diverse range of backgrounds. The BJT Board considers that collectively, the Directors have the range of skills, experience and expertise necessary to appropriately govern BJT. Details of each Director’s skills, experience and expertise relevant to their position and their term in office and details of their attendance at BJT Board and/or Committee meetings are set out in the Directors’ Report on page 47 to 54 of the 2008 Annual Report.

The Directors appointed to the BJT Board, along with their appointment dates, are set out below: Position

Allan McDonald

Independent Non-Executive Chairman

Appointed

2005

Eric Lucas

Managing Director

2004

Paula Dwyer

Independent Non-Executive Director

2005

Phil Green

Non-Executive Director

2005

John Pettigrew

Independent Non-Executive Director

2005

The BJT Board has determined the independent status of each Director using the criteria set out in Recommendation 2.1. As shown in the table above, the BJT Board comprised a majority of independent non‑executive Directors during the 2008 Financial Year.

BOARD COMMITTEES AND MEMBERSHIP The BJT Board has established an Audit, Risk & Compliance Committee to support an effective governance framework and to advise and support the BJT Board in carrying out its duties. The Chairman of the Committee reports on any matters of substance at the next BJT Board meeting and all Committee minutes are provided to the BJT Board.

The Committee has its own Charter setting out the authority under which it operates and the responsibilities as delegated by the BJT Board. The Charter is reviewed annually. Appointment to the Committee is based on a Director’s skills and experience as well as their ability to add value to the Committee. The Managing Director attends all Committee meetings by invitation and any Directors may attend any meeting of the Committee.

The Committee comprises wholly of independent non-executive Directors, namely Ms Paula Dwyer (Chairman), Mr Allan McDonald and Mr John Pettigrew.

Babcock & Brown Japan Property Trust Annual Report 2008 – Corporate Governance

Name

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Corporate Governance (continued) ASX Recommendation 2.2: The chairperson should be an Independent Director.

The Chairman of the Responsible Entity, Mr Allan McDonald, is an Independent Director in accordance with the criteria prescribed under Recommendation 2.2.

To ensure that there is an appropriate balance in the manner in which the Directors discharge their responsibilities and an independent review of the performance of management, the BJT Board has: • established an Audit, Risk & Compliance Committee, wholly comprised of independent non-executive Directors; • established protocols for dealing with conflicts of interest. In particular, the BJT Board has put in place a range of internal policies designed to ensure that the interests of Unitholders are at all times preferred to those of Directors and that any actual or potential conflicts of interest are promptly disclosed and dealt with by the Directors. These protocols are in the Board Charter, the Code of Conduct and the Securities Trading Policy; • ensured that significant matters affecting BJT are reserved for consideration by the BJT Board, for example major strategic decisions, capital expenditure above specified thresholds and expenditure outside the ordinary course of business; and • determined that any Director is entitled to seek independent professional advice (including, but not limited to, legal, accounting and financial advice) at BJT’s expense on any matter connected with the discharge of his or her responsibilities, in accordance with the procedures set out in the Board Charter. No Director availed himself or herself of this right during the year.

ASX Recommendation 2.3: The roles of chair and chief executive officer should not be exercised by the same individual.

The roles of Chairman and Chief Executive Officer (in this case the Managing Director) are not exercised by the same individual for BJT. The Board Charter provides that the roles of the Chairman and Managing Director must not be exercised by the same person. The respective roles and responsibilities of the Chairman and the Managing Director are described in the Board Charter.

ASX Recommendation 2.4: The Board should establish a Nomination Committee.

Given the small size of the BJT Board, the Directors have decided not to establish a Nomination Committee.

This is inconsistent with Recommendation 2.4, although the recommendation itself recognises that a Nomination Committee does not provide the same efficiencies for smaller boards. As the Responsible Entity is a wholly owned subsidiary of Babcock & Brown, the selection and appointment of new Directors to the BJT Board may be made by the Directors or by Babcock & Brown in accordance with the Constitution of the Responsible Entity. In practice, Babcock & Brown and the BJT Board will consult each other and assess the appropriate mix of skills, experience and expertise required on the BJT Board at the time of making any future appointment of Directors.

ASX Recommendation 2.5: Companies should disclose the process for evaluating the performance of the Board, its Committees and individual Directors.

The BJT Board is responsible for reviewing and monitoring the performance of the Chairman, the Managing Director and other individual members of the BJT Board, and for establishing key performance criteria against which such performance can be evaluated.

In addition, the Board Charter requires the BJT Board, at least once a year, to review and evaluate the performance of the BJT Board, its committees and each individual Director against relevant charters, corporate governance policies and agreed goals and objectives. This review and evaluation is scheduled to occur in November of each year. Following each review and evaluation, the BJT Board considers how to improve its performance.

The BJT Board also sets the goals and objectives for itself and its committees each year and, if necessary, amends the relevant charters and policies to better reflect these goals and objectives.

Given the small size of the BJT Board and the fact that it has not established a Nomination Committee (refer to Principle 2.4 above), the above functions are reserved for the BJT Board.

The review of the performance of key executives of the BJT management team is undertaken by the Managing Director in conjunction with senior management of Babcock & Brown.

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ACHIEVEMENTS IN 2007/2008: • The BJT Board completed a Board Performance Review during the 2008 financial year and set a number of goals and objectives to be achieved in the next year.

ASX Principle 3: Promote ethical and responsible decision-making Companies should actively promote ethical and responsible decision-making.

CODE OF CONDUCT ASX Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code.

The BJT Board is committed to delivering strong returns and Unitholder value whilst also promoting Unitholder and general market confidence in BJT and to fostering an ethical and transparent culture within BJT. As the Responsible Entity of BJT is a wholly owned subsidiary of the Babcock & Brown Group, its Directors and the BJT management team are subject to the Babcock & Brown Code of Conduct which is designed to ensure that: • high standards of corporate and individual behaviour are observed by all Directors and employees in the context of their employment and in relation to all of BJT’s activities; and • employees are aware of their responsibilities to BJT under their contract of employment with Babcock & Brown and always act in an ethical and professional manner and in the best interests of BJT Unitholders.

The Code of Conduct requires Directors and employees among other things, to:

The Code of Conduct requires Directors and employees to report any actual or potential breach of the law, the Code of Conduct or other policies. A summary of the Code of Conduct is available on BJT’s website.

In addition, Babcock & Brown’s Whistleblowing Policy, which similarly applies to Directors and the BJT management team, promotes and encourages ethical behaviour and provides protection for those who report violations.

In addition to the Code of Conduct, the Board Charter requires that all Directors conduct their duties with the highest level of honesty and integrity, observe the rule and spirit of the law, comply with any relevant ethical and technical standards, not make improper use of any confidential information, and set a high standard of fairness, diligence and competency in their position as a Director.

BJT recognises that it has a number of legal and other obligations to its non-unitholder stakeholders, including the BJT management team, clients and the wider community.

As outlined above, the Directors and the BJT management team are subject to the Code of Conduct of the Babcock & Brown Group requiring Directors and employees to observe high standards of corporate and individual behaviour. The objectives of the Code of Conduct include ensuring that employees, suppliers, clients and competitors can be assured that BJT will conduct its affairs in accordance with ethical values and practices. Employees are required to comply with both the spirit as well as the letter of the ASX Listing Rules and all laws which govern the operations of BJT. The Code of Conduct specifically requires all employees to always deal with unitholders, clients, customers, suppliers, competitors and other employees in a manner that is lawful, diligent and fair and with honesty, integrity and respect.

In accordance with its Code of Conduct, Babcock & Brown aims to provide a work environment in which all employees can excel regardless of race, religion, age, disability, gender, sexual preference or marital status.

In this regard, Babcock & Brown maintains various policies relating to the workplace, including in respect of non-discrimination and occupational health and safety issues.

The principles of fairness, honesty and propriety are essential elements of the various policies which have been adopted by BJT.

Babcock & Brown Japan Property Trust Annual Report 2008 – Corporate Governance

• avoid conflicts of interest between their personal interests and those of BJT and its clients; • not take advantage of opportunities arising from their position for personal gain or in competition with BJT; and • comply with BJT’s Securities Trading Policy and other policies.

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Corporate Governance (continued) SECURITIES TRADING POLICY ASX Recommendation 3.2: Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy.

BJT has implemented a formal Securities Trading Policy which regulates the manner in which Independent Directors of BJT and any key management personnel of BJT who are employees of BJT and not the Babcock & Brown Group (“BJT Employees”) can buy or sell BJT units, and requires that they conduct their personal investment activities in a manner that is lawful and avoids conflicts between their own interests and those of BJT. The policy also extends to a BJT Employee’s domestic partner or spouse, any minor children and other members of the BJT Employee’s household, and any person (including body corporate) over which the BJT Employee has the ability to influence or make investment decisions or otherwise exercise control over investment decisions.

The policy is specifically designed to raise awareness and minimise any potential for breach of laws under the Corporations Act relating to insider trading. The policy is also designed to minimise the chance that misunderstandings or suspicions arise regarding trading while in possession of non-public price-sensitive information.

The policy specifies trading windows as the periods during which trading in BJT units can occur. These trading windows will generally be four to eight week periods following the release of BJT’s full-year or half‑year results, a four to eight week period following the issue of BJT’s Annual Report, and during the offer period under any prospectus or similar offer document. Trading is prohibited despite a window being open if the relevant person is in possession of non-public price-sensitive information regarding BJT. The BJT Board may authorise the opening of trading windows at other times for such period, as considered appropriate.

The BJT Employees are required to notify the Company Secretary (who in turn notifies the Chairman) of any proposed trading by them in securities issued by BJT and the details of any completed trades.

The Managing Director, Mr Lucas, the Non-Executive Director, Mr Green and the BJT management team are all employees of the Babcock & Brown Group. As such, all of these people are subject to the Securities Trading Policy of Babcock & Brown Limited which restricts the trading in BJT units on terms similar to those contained in the BJT Securities Trading Policy.

A summary of BJT’s Securities Trading Policy is available on BJT’s website.

ACHIEVEMENTS IN 2007/2008: • The BJT Board undertook a detailed review of its Securities Trading Policy and a revised policy was adopted by the BJT Board on 18 June 2008.

ASX Principle 4: Safeguard Integrity in Financial Reporting Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.

AUDIT, RISK & COMPLIANCE COMMITTEE ASX Recommendation 4.1: The Board should establish an Audit Committee.

The BJT Board is committed to the basic principle that BJT’s financial reports are true and fair and comply with the relevant accounting standards. To assist the BJT Board with this commitment, an Audit, Risk & Compliance Committee of the BJT Board has been established which is responsible for advising the BJT Board on internal controls and appropriate standards for the financial management of BJT. It is the BJT Board’s responsibility to ensure that an effective internal control system is in place across BJT. This includes internal controls to deal with both the effectiveness and the efficiency of significant business processes, the safeguarding of assets, the maintenance of proper accounting records and the reliability of financial information. The BJT Board has delegated the responsibility for the establishment and maintenance of BJT’s system of internal control to the Audit, Risk & Compliance Committee.

The Committee assists the BJT Board in fulfilling its corporate governance and oversight responsibilities relating to financial accounting practices, risk management and internal control systems, external reporting, monitoring compliance, the external audit function and the Responsible Entity’s processes for monitoring compliance with laws and regulations. The Committee assists the BJT Board to discharge its responsibilities under the Compliance Plan adopted by the Responsible Entity.

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The Audit, Risk & Compliance Committee provides advice to the BJT Board and reports on the status of the business risks to BJT through its risk management processes aimed at ensuring risks are identified, assessed and properly managed.

The Committee works on behalf of the BJT Board with the external auditor and reviews non-audit services provided by the external auditor to confirm that they are consistent with maintaining external audit independence.

ASX Recommendation 4.2: The audit committee should be structured so that it: • consists only of non-executive directors; • consists of a majority of independent directors; • is chaired by an independent chair, who is not the chair of the Board; and • has at least three members.

The Audit, Risk & Compliance Committee is wholly comprised of independent non-executive Directors.

The attendance of the Committee members at Committee Meetings is disclosed in the Directors’ Report.

For the entire 2008 financial year, the Audit, Risk & Compliance Committee comprised Ms Paula Dwyer (independent non-executive Committee Chairman), Mr Allan McDonald and Mr John Pettigrew. All members possess the requisite financial expertise.

The structure of the Audit, Risk & Compliance Committee accords with ASX Recommendation 4.2 in that the Committee is comprised wholly of independent Directors, has an independent chairman who is not the chairman of the BJT Board and has at least three members.

The Audit, Risk & Compliance Committee generally meets as required but normally meets not less than four times per year. The Audit, Risk & Compliance Committee reports to the BJT Board following each Committee meeting, including making any recommendations that require BJT Board approval or action.

The Audit, Risk & Compliance Committee has adopted a Charter. The responsibilities of the Committee pursuant to its Charter include: Financial reports for the half year and full year • review and consider the financial reports for the half year and full year and consider whether they are complete, consistent with information known to Committee members, and reflect appropriate accounting policies and principles; • consider in connection with the half year and full year financial reports the CEO (in this case the Managing Director) and CFO (in this case the Financial Controller) letters of representation to the BJT Board; • review the financial sections of the annual report and related regulatory filings before release; • review with management and the external auditors the results of the audit; Internal control • review the effectiveness of BJT’s internal controls regarding all matters affecting BJT’s financial performance and financial reporting, including information technology security and control; • review the scope of internal and external auditors’ review of internal control, review reports on significant findings and recommendations, together with management’s responses, and recommend changes from time to time as appropriate; Internal audit • review with management and the internal auditor, the charter, plans and activities of the internal audit activity; • meet the internal auditor to review reports and monitor management response; • meet separately, when necessary, to discuss any matters that the Committee or internal audit believes should be discussed privately; • review the effectiveness of the internal audit activity; • ensure there are no unjustified restrictions or limitations, and review and concur in the appointment, replacement or dismissal of the internal auditor by management;

Babcock & Brown Japan Property Trust Annual Report 2008 – Corporate Governance

ASX Recommendation 4.3: The Audit Committee should have a formal charter.

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Corporate Governance (continued) External financial audit • review the external auditors’ proposed audit scope and approach; • meet with the external auditors to review reports, and meet separately, at least once a year, to discuss any matters that the Committee or auditors believe should be discussed privately; • review and confirm the independence of the external auditors by obtaining statements from the auditors on relationships between the auditor and BJT including non-audit services and discussing the relationships with the external auditor; • review the performance of the external auditors, and consider the re-appointment and proposed fees of the external auditor and, if appropriate, conduct a tender for the audit. Any subsequent recommendation following the tender for the appointment of an external auditor will be put to the BJT Board; Risk management • consider BJT’s overall risk management framework and its effectiveness in meeting sound corporate governance principles and keep the BJT Board informed of all significant business risks; • review with management the system for identifying, managing and monitoring the key risks of BJT; • obtain reports from management on the status of any key risk exposures or incidents; Compliance • monitor to what extent BJT complies with its Compliance Plan and report on its findings to the BJT Board; • report to the BJT Board: – any breach of the Corporations Act involving BJT; – any breach of BJT’s Constitution, of which the Committee becomes aware or that it suspects; • report to the Australian Securities and Investments Commission if the Committee is of the view that the Responsible Entity has not taken, or does not propose to take, appropriate action to deal with a breach of the Corporations Act or BJT’s Constitution; • assess at regular intervals whether the Compliance Plan is adequate, report on the assessment and make recommendations to the BJT Board about any changes that the Committee considers should be made to the Compliance Plan; • obtain regular updates from management and BJT’s compliance manager regarding compliance matters; • review the effectiveness of the system for monitoring compliance with laws and regulations affecting BJT and the Responsible Entity (in its capacity as responsible entity of BJT) and the results of management’s investigation and follow-up (including disciplinary action) of any instances of non-compliance; • review the findings of any examinations by regulatory agencies; • review the process for communicating the code of conduct to employees, and for monitoring compliance therewith; Reporting responsibilities • regularly report to the BJT Board about Committee activities, issues and related recommendations; • provide an open avenue of communication between internal audit, the external auditors and the BJT Board. For the purpose of supporting the independence of their function, the external auditor, the compliance plan auditor and the internal auditor have a direct line of reporting access to the Committee; • report annually to the Unitholders on matters relating to Committee responsibilities as required by law or the ASX Listing Rules; and • review any other reports BJT issues that relate to Committee responsibilities.

Internal audit The BJT Board has overall responsibility for BJT’s systems of internal control, supported by the Audit, Risk & Compliance Committee. The BJT Board is assisted in discharging this responsibility by Babcock & Brown’s Internal Audit function which operates under a written charter from Babcock & Brown.

The Internal Auditor discusses significant issues from Internal Audit Reports at meetings of the Audit, Risk & Compliance Committee and distributes Internal Audit Reports to senior management of BJT. During the year, the internal audit program reviewed a number of BJT’s internal controls with a view to ensuring that they are operating effectively and efficiently in accordance with financial reporting requirements, good operational and governance practices and in compliance with regulations, to assist BJT in achieving business objectives.

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Under the oversight of the BJT Risk Manager, BJT continued to enhance the BJT risk management framework during the year.

To assist the BJT Board and the Audit, Risk & Compliance Committee to discharge their respective responsibilities, the CEO (in this case the Managing Director) and the Chief Financial Officer (in this case the Financial Controller) are required to provide the BJT Board with a letter of representation in connection with the half-year and full-year financial statements of BJT. Such letter of representation confirms to the BJT Board that BJT’s financial reports present a true and fair view, in all material respects, of BJT’s financial condition and operational results and are in accordance with relevant accounting standards. The letter describes the process and evidence that the Managing Director and Financial Controller have adopted to satisfy themselves on these matters.

In respect of the 12 months ended 30 June 2008, the Managing Director and Financial Controller provided such a letter to the BJT Board (refer to “CEO’s and Chief Financial Officer’s Declaration” in the Directors’ Report).

A summary of the Audit, Risk & Compliance Committee Charter is available in the Corporate Governance section on BJT’s website.

ACHIEVEMENTS IN 2007/2008: • The BJT Board undertook a detailed review of the Audit, Risk & Compliance Committee Charter ASX Principle 5: Make Timely and Balanced Disclosure Companies should promote timely and balanced disclosure of all material matters concerning the company.

BJT is committed to complying with its continuous disclosure obligations pursuant to the Corporations Act and the ASX Listing Rules. BJT’s Continuous Disclosure Policy is designed to ensure that all investors have equal and timely access to material information concerning BJT. BJT has complied at all times with the ASX Listing Rules on continuous disclosure.

The policy is designed to ensure that material price sensitive information arising from any part of BJT is immediately notified to the ASX in a complete, balanced and timely manner, unless it falls within the scope of the limited exemptions contained in Listing Rule 3.1A. The Company Secretary of BJT, in conjunction with the Chairman and the Managing Director, is responsible for overseeing the implementation and operation of the policy. The Company Secretary is responsible for reviewing information reported by the Directors or the BJT management team and which is or may be material, determining with the Chairman and the Managing Director whether any such information is required to be disclosed to the ASX, and making ASX announcements and issuing media releases and other written public statements on behalf of BJT. The BJT management team are required to ensure that they are familiar with the policy, report material information to the Company Secretary and provide sufficient details to the Company Secretary to allow a view to be formed as to whether the information requires disclosure.

In addition, the BJT Board is actively and regularly involved in discussing disclosure obligations in respect of all major matters that come before it.

The Company Secretary is primarily responsible for communications with the ASX and for overseeing and maintaining the Continuous Disclosure Policy.

A summary of the Continuous Disclosure Policy is available in the Corporate Governance section on BJT’s website.

Babcock & Brown Japan Property Trust Annual Report 2008 – Corporate Governance

CONTINUOUS DISCLOSURE POLICY ASX Recommendation 5.1: Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.

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Corporate Governance (continued) Continuous Disclosure Processes The specific processes adopted by BJT in relation to its continuous disclosure responsibilities are as follows: • website: all information released to the ASX is posted on the Investor Information section of BJT’s website as soon as practicable; • authorised spokespersons: communication with the media, analysts and the market generally in relation to BJT activities will normally be undertaken only by: the Chairman, Managing Director, and any person who is expressly authorised by the Chairman or Managing Director; • media releases: no media release of a material nature is to be issued unless it has first been sent to the ASX; and • analyst and investor briefings: BJT recognises the importance of the relationship between BJT, investors and analysts. From time to time BJT conducts analyst and investor briefings and in these situations the following protocols apply: – no price sensitive information will be disclosed at these briefings unless it has been previously, or is simultaneously, released to the market; – questions at these briefings that relate to price sensitive information not previously disclosed will not be answered; and – if any price sensitive information is inadvertently disclosed, it will immediately be released to the ASX and placed on BJT’s website.

ACHIEVEMENTS IN 2007/2008: • BJT made 83 ASX announcements during the 2008 financial year.

• An email alert system was introduced to notify retail investors when an announcement was released to the ASX. ASX Principle 6: Respect the Rights of Shareholders Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.

COMMUNICATIONS WITH SHAREHOLDERS ASX Recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.

Consistent with our Continuous Disclosure Policy, BJT is committed to communicating with its Unitholders in an effective and timely manner to provide them with ready access to information relating to BJT. In this regard, BJT maintains a website www.bbjapanpropertytrust.com which provides access to the following information of interest to BJT Unitholders: • detailed information regarding the BJT Board, executive management and the business groups and activities of BJT; • all BJT announcements and media releases, which are posted to the website promptly following release; • copies of full-year and half-year financial reports; • summaries of BJT Board and Committee Charters and relevant corporate governance policies; • copies of BJT’s Annual Reports; • copies of disclosure documents relating to BJT’s capital raisings; and • the website of BJT’s Unit Registry, Link Market Services, including a facility for Unitholders to amend their particulars.

BJT encourages Unitholders to use its website as their primary tool to access Unitholder information and disclosures. In addition, the Annual Report facilitates the provision to Unitholders by BJT on a yearly basis of detailed information in respect of the major achievements, financial results and strategic direction of BJT.

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BJT has a practice that information to be given by BJT at analyst briefings is first released to the ASX to ensure that the market operates on a fully informed and equal basis.

BJT is not required to hold annual general meetings, however it may convene general meetings from time to time. Where BJT convenes a general meeting, Unitholders are strongly encouraged to attend and participate in such meetings. BJT will provide Unitholders with details of any proposed meetings well in advance of the relevant dates.

In the event that a general meeting is convened at which BJT’s financial statements will be considered, BJT’s external Auditor will be requested to attend and be available to answer Unitholder questions about the conduct of the audit and the preparation and content of the auditor’s report.

ACHIEVEMENTS IN 2007/2008: • BJT adopted a policy regarding the electronic distribution of Unitholder communications.

ASX Principle 7: Recognise and Manage Risk Companies should establish a sound system of risk oversight and management and internal control.

Risk Management Policy ASX Recommendation 7.1: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.

The BJT Board is ultimately responsible for overseeing and managing the material risks of BJT. The Audit, Risk & Compliance Committee assists the BJT Board in this role. In accordance with its Charter, the role of the Audit, Risk & Compliance Committee includes reviewing and managing the system for identifying, managing and monitoring the key risks to BJT and obtaining reports from management on the status of any key risk exposures or incidents. In undertaking these responsibilities, the Committee principally relies on the resources and expertise of management to implement and report upon the risk management systems and procedures implemented, such that the Committee is able to keep the BJT Board informed of all material business risks.

BJT has adopted a Risk Management Policy consistent with Australia/New Zealand Standard 4360, which clearly defines responsibilities for managing risk under BJT’s risk management processes. The material risks of BJT’s business, including operational, financial, market and regulatory compliance risks have been identified and are required to be regularly managed, monitored and reported. Methods for treating and mitigating risks include transferring, reducing, accepting or passing on risk following assessment using a variety of methods. A summary of the Risk Management Policy is available on BJT’s website.

The Audit, Risk & Compliance Committee includes amongst its responsibilities: • consideration of the overall risk management framework of BJT and the review of its effectiveness in meeting sound corporate governance principles; • keeping the BJT Board informed of all significant business risks; • reviewing in conjunction with management the system for identifying, managing and monitoring the key risks to BJT; and • obtaining reports from management on the status of any key risk exposures or incidents.

Babcock & Brown Japan Property Trust Annual Report 2008 – Corporate Governance

Management of risk, particularly preservation of capital, continues to be a primary objective of BJT in all its business activities. BJT is committed to ensuring that its system of risk oversight, management and internal control complies with the ASX Principles and that its culture, processes and structures facilitate realisation of BJT’s business objectives, including potential opportunities, while managing adverse effects and preserving capital.

43

Corporate Governance (continued) ASX Recommendation 7.2: The Board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks.

Under the direction of BJT’s Risk Manager, BJT has continued to enhance its risk management framework.

BJT’s Risk function plays a key role in developing and building an approach to assist the BJT Board in identifying, monitoring and treating risk and in reporting material risks to the Audit, Risk & Compliance Committee. Key risk areas across BJT are identified in a Risk Register and progress in implementing action plans is monitored via regular meetings with key management and reported quarterly to the Audit, Risk & Compliance Committee.

BJT’s Compliance Function promotes a compliance conscious culture, and operates to ensure that BJT complies with regulatory requirements across its businesses, divisions and functions.

In accordance with the requirements of the Corporations Act, the Responsible Entity has also put in place a Compliance Plan in relation to BJT. The Compliance Plan sets out the measures that the Responsible Entity applies in operating BJT to ensure compliance with the Corporations Act, the Constitution of BJT, the Responsible Entity’s licence obligations and other regulatory parameters. The discharge by the Responsible Entity of its obligations under the Compliance Plan is monitored by the Audit, Risk & Compliance Committee.

This provides the primary tool by which the Responsible Entity manages the legal and regulatory risks associated with BJT. The Compliance Manager of the Responsible Entity administers the Compliance Plan for BJT and reports to the Audit, Risk & Compliance Committee on these matters. An audit of the manner in which the Responsible Entity has discharged its obligations under the Compliance Plan is undertaken by the Compliance Plan auditor on an annual basis, and reviews such compliance on a half yearly basis.

To facilitate monitoring and evaluation of the effectiveness of internal controls, BJT has established accounting policies, reporting and risk management and compliance systems to keep the Audit, Risk & Compliance Committee informed of strategic, reputational, financial and operational risks facing BJT. Quarterly management certification confirms that appropriate internal controls are in place and that the BJT Risk Management Policy and other key guidelines and procedures are being observed.

Babcock & Brown’s Internal Audit function, operating under a written charter, provides independent reporting to the Audit, Risk & Compliance Committee with respect to the management of risk and also advises on the effectiveness of the design and operation of controls across BJT. ASX Recommendation 7.3: The Board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.

As outlined above, and in accordance with Recommendation 7.3, the CEO (in this case the Managing Director) and Chief Financial Officer (in this case the Financial Controller) have stated to the BJT Board in writing that internal compliance and control systems applicable to BJT’s business lines and functional groups were operating efficiently and effectively in all material respects during the period to 30 June 2008 (see the “CEO’s and Chief Financial Officer’s Declaration” in the Directors’ Report).

ACHIEVEMENTS IN 2007/2008: • Babcock & Brown internal audit reviews commenced; and • Treasury Risk Management undertook a detailed review of the hedging program and a revised policy was adopted by the BJT Board.

44

ASX Principle 8: Remunerate Fairly and Responsibly Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear.

REMUNERATION POLICY The Managing Director, Mr Lucas, the Non-Executive Director, Mr Green and the BJT management team are all employees of the Babcock & Brown Group. As such, all of these people are remunerated by the Babcock & Brown Group rather than by BJT. Total remuneration of the Managing Director, the Non-Executive Director and the BJT management team is delivered through a combination of base salary, an annual performance bonus and, for some executives, through an equity incentive plan of Babcock & Brown Limited. Babcock & Brown continually reviews the remuneration philosophy and framework as it applies to BJT to ensure alignment of the interests of management with those of BJT Unitholders.

In such cases, the BJT Board implements steps to ensure that such conflicts of interest are declared, managed and, where practicable, removed. Such steps include ensuring that the Managing Director and the Non-Executive Director declare an interest in circumstances where there are dealings between the Babcock & Brown Group and BJT and that, in those cases, the Managing Director and the Non-Executive Director abstain from voting on all such matters. Other steps may include seeking independent third party advice in some cases or having matters considered by a sub-committee of the BJT Board comprising solely the Independent Directors. These measures are designed to ensure that, in the event of a conflict of interest, the interests of Unitholders are given priority over the interests of the Babcock & Brown Group and the Managing Director and the Non-Executive Director.

REMUNERATION COMMITTEE ASX Recommendation 8.1: The Board should establish a remuneration committee Given the nature of the above remuneration practices being external to BJT and the fact that they do not affect the financial performance of BJT, the BJT Board has not established a Remuneration Committee.

This does not accord with ASX Recommendation 8.1, although such recommendation again notes that a Remuneration Committee is more appropriate for larger companies.

NON-EXECUTIVE DIRECTOR REMUNERATION ASX Recommendation 8.2: Companies should clearly distinguish the structure of Non-Executive Directors’ remuneration from that of executives.

Independent Non-Executive Directors are paid an annual fee for their service on the BJT Board and all committees of the BJT Board. Independent Non-Executive Directors are not provided with retirement benefits other than statutory superannuation and do not receive options or bonus payments.

All Independent Non-Executive Director remuneration is paid by the Responsible Entity and is not an expense of BJT.

Babcock & Brown Japan Property Trust Annual Report 2008 – Corporate Governance

The BJT Board acknowledges that the remuneration of the Managing Director and the Non-Executive Director by the Babcock & Brown Group is also partly determined by reference to the performance of that group and their individual performance in connection with that group. In this regard, the BJT Board recognises that there is scope for potential conflicts of interest to arise, both in terms of the Babcock & Brown Group’s dealings with BJT and in terms of the dual roles of the Managing Director, the Non‑Executive Director and certain executives in the BJT management team. For instance, the Babcock & Brown Group is expected to earn fees and other income from its management of and other dealings with BJT, and the remuneration of the Managing Director and the Non-Executive Director by the Babcock & Brown Group may be partly determined by reference to the level of such fees and income.

45

Shinjuku Fuji

Directors’ Report The Directors of Babcock & Brown Japan Property Management Limited (ABN 94 111 874 563) (“the Responsible Entity”), the Responsible Entity of Babcock & Brown Japan Property Trust (ARSN 112 799 854) (“the Trust”), present their report together with the financial report of the Trust and of the Group, being the Trust and its controlled entities, for the year ended 30 June 2008 and the Auditor’s report thereon.

Trust information The Trust was established, with Babcock & Brown Japan Property Management Limited as its Responsible Entity, on 31 January 2005. The Trust became a registered scheme under the Corporations Act 2001 on 17 February 2005.

The Trust was listed on the Australian Securities Exchange on 4 April 2005.

The Trust, registered and domiciled in Australia, is a registered managed investment scheme.

The life of the Trust is not limited by a term of years but may terminate on the happening of certain events in accordance with the Trust Constitution.

The registered office and principal place of business of the Responsible Entity and the Trust is Level 23, Chifley Tower, 2 Chifley Square, Sydney NSW 2000.

The Responsible Entity had three employees at the end of the period, being the Independent Non‑Executive Directors.

Babcock & Brown Japan Property Trust Annual Report 2008 – Directors’ Report

The Responsible Entity The Directors of the Responsible Entity at any time during or since the period end are listed on pages 48 and 49.

47

Directors Allan McDonald Independent Non-Executive Chairman Member of the Audit, Risk & Compliance Committee Allan was appointed as a Director on 19 February 2005.

Allan holds a Bachelor of Economics Degree from the University of Sydney and is a Fellow of the Australian Society of Certified Practicing Accountants, a Fellow of Chartered Secretaries Australia, a Fellow of the Australian Institute of Management and a Fellow of the Australian Institute of Company Directors. Allan has extensive experience in the investment and commercial banking fields and is presently associated with a number of companies as a consultant and company director. Allan is Chairman of Ross Human Directions Limited, Brookfield Multiplex Funds Management Limited as responsible entity of the Multiplex Property Trust and the Multiplex SITES Trust. Allan is also a director of Billabong International Limited.

Eric Lucas Managing Director Eric was appointed as a Director on 19 November 2004.

Eric joined Babcock & Brown in 1987 and in July 2006 was appointed the Global Head of Real Estate. Prior to joining Babcock & Brown, Eric worked at the international law firm of Anderson Mori and Rabinowitz in Tokyo. In 1987, he joined Babcock & Brown’s Japanese joint venture, Nomura Babcock & Brown until 1992.

After several years at Babcock & Brown’s San Francisco office Eric returned to Tokyo in 1998 to establish Babcock & Brown’s Japan office. Eric holds a law degree from the University of Melbourne in Australia.

Phil Green Director Phil was appointed as a Director on 31 January 2005. On 13 September 2008, Phil Green announced his formal resignation from the Board.

Phil Green joined Babcock & Brown in 1984. Phil was the Managing Director of Babcock & Brown until its IPO listing in October 2004 where he became Chief Executive Officer of the Global Business. Prior to joining Babcock & Brown, Phil worked as a Senior Manager with Arthur Andersen, where he specialised in taxation.

Phil is a Director of Babcock & Brown Limited, Babcock & Brown Infrastructure Limited, Babcock & Brown Capital Limited and Everest Babcock & Brown Limited. Phil holds Bachelor of Commerce and Bachelor of Law degrees from the University of New South Wales. He qualified as a Chartered Accountant in 1981 and was admitted as a solicitor in NSW in 1978.

Paula Dwyer Independent Non-Executive Director Chairman of the Audit, Risk & Compliance Committee Paula was appointed as a Director on 19 February 2005.

Paula has extensive experience in the securities, investment management and investment banking sectors.

In particular, Paula specialised in the provision of corporate financial advice to companies operating in regulated industries, including financial institutions and utilities. Paula is a non-executive Director of Suncorp Metway Limited. She is also a non-executive Director and chairman of the Audit Committee of Tabcorp Holdings Limited. She was formerly a director of David Jones Limited until December 2007. Paula holds a Bachelor of Commerce degree from the University of Melbourne. Paula is on the ASIC Business Consultative Panel (Melbourne Chapter), a Member of the Takeovers Panel and Vice President of the Baker Heart Research Institute. Paula is a Fellow of the Australian Institute of Chartered Accountants, a Fellow of the Australian Institute of Company Directors and a Fellow of the Financial Services Institute of Australia.

48

JOHN PETTIgREW Independent Non-Executive Director Member of the Audit, Risk & Compliance Committee John was appointed as a Director on 19 February 2005.

Babcock & Brown Japan Property Trust Annual Report 2008 – Directors’ Report

John has extensive financial and commercial experience with a number of major corporations and 30 years involvement in the property industry. John is a Fellow of the Australian Society of Certified Practicing Accountants, a Fellow of Chartered Secretaries Australia, a Fellow of the Australian Institute of Management and a Member of the Australian Institute of Company Directors. John was Chief Financial Officer and Company Secretary of the Stockland Group from 1977 and Finance Director from 1982 until his retirement in March 2004 and is a director of Rubicor Group Limited. He has had a significant role in structuring and managing listed property trusts since 1980.

From left to right: John Pettigrew, Paula Dwyer, Eric Lucas, Allan McDonald, Phil Green

49

Directors’ Report (continued) Melanie Hedges Company Secretary Melanie was appointed Company Secretary on 21 December 2005.

Melanie joined Babcock & Brown in October 2005 as Company Secretary for a number of Babcock & Brown’s affiliated listed and unlisted specialised funds and is responsible for the company secretarial function and corporate governance for the boards and committees of these group entities. Prior to joining Babcock & Brown, Melanie was Joint Company Secretary from July 2005 and Assistant Company Secretary from 2002 of the Mirvac Group. Melanie is an Affiliate of Chartered Secretaries Australia.

Former listed entity directorships held in the last three years by the Directors of the Responsible Entity are listed below: Director

Company

Date appointed

Date ceased

Allan McDonald

DCA Group Limited Multiplex Limited Brambles Industries Limited

May 1988 October 2003 March 1981

December 2006 October 2007 November 2005

Phil Green

Thakral Holdings Group Abacus Property Group Responsible entity of the MTM Entertainment Trust Babcock & Brown Environmental Investments Limited

February 2004 October 2002

July 2007 September 2006

July 2005

July 2007

January 2002

De-listed June 2008

David Jones Limited

November 2003

December 2006

Paula Dwyer

Meetings of Directors The number of Directors’ meetings (including meetings of the Committee) and the number of meetings attended by each of the Directors of the Responsible Entity during the year were: Audit, Risk & Compliance Committee

Board Meetings Director

A

B

C

D

Paula Dwyer

14

15

4

4

Eric Lucas

15

15

–

–

Phil Green

6

15

–

–

Allan McDonald

15

15

4

4

John Pettigrew

14

15

4

4

A, C – Number of meetings attended.

B, D – Number of meetings held during the time the director held office during the year.

Principal activities The principal activities of the Trust during the financial period were investments in interests in properties in Japan, with any surplus Australian funds being invested in short-term deposits or used for on-market buy‑backs. There were no significant changes in the nature of the Trust’s activities during the year.

50

Review and results of operations The profit attributable to Unitholders for the year was $121,627,000 (30 June 2007: $129,195,000).

During the period the Trust acquired interests in eight properties (three retail, three office, and two residential) with a total purchase price of $480,451,000. Six of the properties were acquired in September 2007 and the remaining two in December 2007. Capital sources of the Trust included an institutional placement and unit purchase plan in September 2007 for $54,119,000 and drawdown of corporate debt facilities of $91,500,000, of which $35,000,000 has subsequently been repaid.

Three properties were disposed of during the period (two office and one retail) comprising 5.0% of the total portfolio at 30 June 2008. Total consideration received for the properties was $129,750,000, an average of 50.1% above carrying value.

In December 2007, in accordance with the approval received from the Australian Securities and Investments Commission, the Trust commenced an on-market buy-back of its units. As at 30 June 2008, 20,345,269 units have been purchased for a total consideration of $21,752,000, an average of $1.07 per unit.

The maximum number of units permitted to be purchased under the ASIC approval is 49,309,622. The term of the buy-back period is 12 months and ends on 20 November 2008.

The Trust had interests in 44 properties at 30 June 2008 (30 June 2007: 39).

Net property income from interests in investment properties is set out below.

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Retail

36,461

28,113

Office

35,666

27,969

5,236

2,081

77,363

58,163

–

3,928

77,363

62,091

Residential Associate Total net property income from interests in investment properties

In accordance with the Trust’s investment property accounting policy the Trust assessed the fair value of investment properties during the year which resulted in a net upwards movement of $62,846,000 (Year ended June 2007: $20,626,000).

Babcock & Brown Japan Property Trust Annual Report 2008 – Directors’ Report

Consolidated

51

Directors’ Report (continued) Distributions Distributions declared and/or paid during the year ended 30 June 2008 were: Year ended 30 Jun 08

Year ended 30 Jun 07

Final distribution • Distribution cents per Unit • Payment date

6.72¢

6.15¢

3/09/08

31/08/07

6.33¢

5.75¢

29/02/08

28/02/07

Interim distribution • Distribution cents per Unit • Payment date

Distributions of 13.05 cents per Unit for the year ended 30 June 2008 were 9.7% higher than the 11.90 cents per Unit for the year ended 30 June 2007.

Significant changes in the state of affairs In the opinion of the Directors of the Responsible Entity, there were no significant changes in the state of affairs of the Group that occurred during the financial period under review.

Environmental regulations To the best of their knowledge and belief after making due enquiry, the Directors have determined that the Trust has complied with all significant environmental regulations applicable to its operations in the jurisdictions in which it operates.

Significant events after the balance date On 31 July 2008 the capital hedge portfolio was reset by unwinding the pre-existing capital hedges and establishing new capital hedges for approximately 20.4% of the Trust’s net investment in Japanese assets (previously 39%). This resulted in net cash realised of $18,819,000. At 30 June 2008 the value of the pre‑existing capital hedges was $21,502,000.

The Trust has purchased an additional 460,403 units since reporting date for a total consideration of $325,000 under the on-market buy-back program.

Future developments and results In the opinion of the Directors, disclosure of any further information on future developments and results other than is already disclosed in this report or the Financial Statements would be unreasonably prejudicial to the interests of the Group.

Interests of the Responsible Entity The Responsible Entity holds 4,000,000 Units (0.8%) directly in the Trust. As at 30 June 2008, the Babcock & Brown Group and its associates held 20,774,694 Units (4.1%) in the Trust, which includes the Responsible Entity’s holding as above.

52

Responsible Entity’s remuneration The basis of fees paid to the Responsible Entity is set out in Note 31 to the Financial Statements. Set out below are the fees paid or payable by the Trust to the Responsible Entity and its associates during the year: Consolidated Year ended 30/06/08 $’000

Year ended 30/06/07 $’000

Trust base fee – payable to Responsible Entity

2,463

1,180

Asset base fee – payable to Japan Asset Manager

6,583

4,499

602

131

9,648

5,810

TK distributions – payable to TK Operator Total base fees Asset performance fee

14,509

2,101

Asset performance fee rebate – receivable from Responsible Entity

(5,400)

(2,101)

Total performance fees Total Asset Management Fees paid or payable to Responsible Entity and related parties

9,109

–

18,757

5,810

30/06/07 $’000

34,615

29,912

The following amounts are included in accounts payable as owed to the Responsible Entity or related parties at balance date relating to Asset Management Fees

Directors’ interests The relevant interests of each Director of the Responsible Entity in Units of the Trust at the date of this report are set out below: Director

Type of Unit

Number held

Allan McDonald

Ordinary

240,000

Eric Lucas

Ordinary

6,966,293

Phil Green

Ordinary

1,530,927

Paula Dwyer

Ordinary

200,000

John Pettigrew

Ordinary

150,000

Units on issue 508,672,564 units of the Trust were on issue as at 30 June 2008 (493,096,223 as at 30 June 2007). During the period, 30,000,000 units were issued by the Trust as part of an institutional placement, 1,282,576 units under a unit purchase plan, and 4,639,034 units under a distribution reinvestment plan. Between December 2007 and June 2008, 20,345,269 units were purchased for a total consideration of $21,751,000.

Trust assets At 30 June 2008 the Group held assets to a total value of $1,851,185,000 (30 June 2007: $1,327,233,000).

The basis for valuation of the assets is disclosed in Note 1 of the Financial Statements.

Babcock & Brown Japan Property Trust Annual Report 2008 – Directors’ Report

Consolidated 30/06/08 $’000

53

Directors’ Report (continued) Auditor’s independence declaration The Group’s lead Auditor has provided a written declaration under section 307C of the Corporations Act 2001 that to the best of his knowledge and belief, there have been no contraventions of: • The Auditor independence requirements of the Corporations Act 2001 in relation to the audit; and • The applicable Australian code of professional conduct in relation to the audit.

The declaration is provided on page 55 and forms part of this Directors’ Report.

Indemnification and insurance of officers and Auditors Indemnification The Responsible Entity indemnifies each person who is or has been a Director or Secretary of the Responsible Entity or of a wholly owned subsidiary of the Responsible Entity against any liability (other than legal costs) incurred by the person in the discharge of their duties as an officer of the Responsible Entity or such other entity (as the case may be), except: • where the liability arises out of conduct involving a lack of good faith; • where the liability is owed to the Responsible Entity or a related body corporate; and • to the extent that the Responsible Entity is precluded by law from indemnifying the officer.

The Responsible Entity also indemnifies each person who is or has been a Director or Secretary of the Responsible Entity or of a wholly owned subsidiary of the Responsible Entity for costs (including legal costs) and expenses incurred by that person in defending an action for a liability incurred as an officer of the Responsible Entity or of a wholly owned subsidiary of the Responsible Entity.

Since the date of commencement, the Trust has not indemnified or made a relevant agreement for indemnifying against a liability any person who is or has been an Auditor of the Trust.

Insurance premiums As part of its insurance arrangements, the Responsible Entity pays insurance premiums in respect of Directors and Officers’ Liability insurance contracts covering Directors and officers of the Responsible Entity.

Under the terms of the Directors and Officers insurance contract, the Responsible Entity is prohibited from disclosing the nature of the liabilities indemnified and the amount of the insurance premium paid.

Rounding The Trust is of a kind referred to in ASIC Class Order 98/100 (as amended) and in accordance with that Class Order, amounts in the financial report and the Directors’ Report have been rounded to the nearest thousand dollars unless otherwise stated.

Dated at Sydney this 15 August 2008.

Signed in accordance with a resolution of the Directors:

F A McDonald Director Babcock and Brown Japan Property Management Limited

54

Auditor’s Independence Declaration

PricewaterhouseCoopers ABN 52 780 433 757

Auditor’s Independence Declaration Auditor’s Independence Declaration

PricewaterhouseCoopers Darling 2 ABN 52Park 780 Tower 433 757 201 Sussex Street GPO BOX 2650 Darling Park Tower 2 SYDNEY NSW 1171 201 Sussex Street DX 77BOX Sydney GPO 2650 Australia SYDNEY NSW 1171 Telephone +61 2 8266 0000 DX 77 Sydney Facsimile Australia +61 2 8266 9999 Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999

2001 in relation to the audit; and a) no contraventions of the auditor independence requirements of the Corporations Act b) no contraventions of any applicable code of professional conduct in relation to the 2001 in relation to the audit; and audit. b) no contraventions of any applicable code of professional conduct in relation to the Thisaudit. declaration is in respect of Babcock & Brown Japan Property Trust and the entities it controlled during the year.

This declaration is in respect of Babcock & Brown Japan Property Trust and the entities it controlled during the year.

AJ Wilson Partner AJ Wilson PricewaterhouseCoopers Partner PricewaterhouseCoopers

Liability limited by a scheme approved under Professional Standards Legislation Liability limited by a scheme approved under Professional Standards Legislation

Sydney 15 August 2008 Sydney 15 August 2008

Babcock & Brown Japan Property Trust Annual Report 2008 – Auditor’s Independence Declaration

As lead auditor for the audit of Babcock & Brown Japan Property Trust for the year ended 30 June 2008, I declare that to the best of my knowledge and belief, there have been: As lead auditor for the audit of Babcock & Brown Japan Property Trust for the year ended 30 June 2008, I declare to the best of my knowledge and belief, there have been: a) no contraventions of that the auditor independence requirements of the Corporations Act

55

Harajuku

Income Statements Statements of Changes in Equity Balance Sheets Statements of Cash Flow Notes to the Financial Statements 1.

Statement of significant accounting policies 2. Net financing costs 3. Distributions received 4. Gain/(loss) on derivatives 5. Other operating expenses 6. Income tax expense 7.

Auditor’s remuneration 8. Earnings per Unit 9. Cash and cash equivalents 10. Trade and other receivables 11. Derivative financial instruments 12. Other assets 13. Other financial assets 14. Deferred taxes 15. Investments in associates accounted for using the equity method 16. Investment properties 17. Leasing arrangements 18. Payables 19. Distributions paid and payable 20. Current tax liabilities 21. Interest bearing loans and borrowings 22. Contributed equity 23. Reserves 24. Undistributed income 25. Minority interests 26. Financial risk management 27. Contingent assets 28. Consolidated entities 29. Segment reporting 30. Notes to the statements of cash flows 31. Related parties 32. Contingent liabilities 33. Events occurring after the balance sheet date 34. Economic dependency Directors’ Declaration Independent Auditor’s Report

58 59 60 61 62 62 70 70 70 70 71 71 72 72 72 72 73 73 73 74 75 76 76 76 76 77 78 79 79 79 80 88 89 89 93 94 97 97 97 98 99

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Financial Statements

57

Income Statements for the year ended 30 June 2008

Consolidated

Note

Revenue Property rental income

Trust

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

109,849

76,581

–

–

Financing income

2

2,301

1,189

2,236

1,171

Distributions received

3

–

–

77,137

37,833

112,150

77,770

79,373

39,004

62,846

20,626

–

–

OTHER INCOME Fair value adjustments to investment property

16(a)

Share of net profit of associates

15

–

3,928

–

–

Gain on derivatives

4

8,669

78,708

8,669

78,708

3,707

–

3,707

–

Net foreign exchange gain Gain on disposal of associate Gain on disposal of investment property Asset performance fee rebate

31

Other income

Total revenue and other income Expenses Property expenses

–

–

–

4,142

40,304

–

–

–

5,400

2,101

5,400

2,101

167

–

–

–

121,093

105,363

17,776

84,951

233,243

183,133

97,149

123,955

(32,486)

(18,418)

31

(23,555)

(7,780)

(2,463)

Financing costs

2

(22,827)

(9,957)

(3,628)

(236)

Loss on derivatives

4

(2,014)

(584)

(2,014)

(584)

Loss on disposal of associate

15

Asset management fee

Loss on disposal of investment property Unrealised loss on financial assets – RJT units

–

(192)

–

Professional fees 5

Total expenses Profit before income tax Income tax expense

(4,240)

(1,050)

Net foreign exchange loss Other operating expenses

–

6

Profit for the year

– (1,039)

–

– (1,180)

–

–

–

–

(1,050) –

– (1,039)

(1,756)

(640)

(1,014)

(279)

(1,594)

(1,308)

(830)

(573)

(85,282)

(44,158)

(10,999)

(3,891)

147,961 (24,836)

138,975 (9,200)

86,150 (10,238)

120,064 (4,728)

123,125

129,775

75,912

115,336

Profit is attributable to: Unitholders of Babcock & Brown Japan Property Trust

24

121,627

129,195

75,912

115,336

Minority interest

25

1,498

580

–

–

123,125

129,775

75,912

115,336

23.65¢

26.71¢

Basic and diluted earnings per ordinary Unit

8

The Income Statements are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 97.

58

Statements of Changes in Equity for the year ended 30 June 2008

Trust

Year ended 30 Jun 07 $’000

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

574,043

511,399

635,159

465,805

(119,779)

–

–

(1,155)

–

–

7,688

(120,934)

–

–

123,125

129,775

75,912

115,336

Total recognised income and expense for the year

130,813

8,841

75,912

115,336

Total recognised income and expense for the year is attributable to: Unitholders of Babcock & Brown Japan Property Trust

129,347

8,261

–

–

1,466

580

–

–

130,813

8,841

–

–

112,612

59,469

112,695

Note

Total equity at the beginning of the year Foreign exchange translation differences

23

Fair value movements on hedge instruments, net of tax

23

Net income/(loss) recognised directly in equity Profit for the year

Minority Interest Total

10,882 (3,194)

Transactions with Unitholders in their capacity as Unitholders: Contributions of equity, net of transaction costs

22

59,415

On–market buy–back

22

(21,752)

Distributions paid or provided for

19

(67,608)

(58,678)

(602)

(131)

Distributions paid/payable to minority interest holders

Total equity at the end of the financial year

–

(21,752) (67,608) –

– (58,678) –

(30,547)

53,803

(29,891)

54,017

674,309

574,043

681,180

635,159

The Statements of Changes in Equity are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 97.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Consolidated Year ended 30 Jun 08 $’000

59

Balance Sheets as at 30 June 2008

Consolidated

Current assets Cash and cash equivalents

Trust

Note

30 Jun 08 $’000

30 Jun 07 $’000

30 Jun 08 $’000

30 Jun 07 $’000

9

135,939

82,524

49,390

5,942

10

7,061

10,322

20,015

27,238

Derivative financial instruments

11

64,949

79,346

64,949

79,346

Other financial assets

13

1,890

–

1,890

–

1,407

–

1,407

–

328

967

–

–

211,574

173,159

137,651

112,526

Trade and other receivables

Current tax asset Other assets

12

Total current assets Non-current assets Derivative financial instruments

11

1,839

2,990

–

–

Other financial assets

13

98

109

655,844

581,135

16

Investment properties

1,630,911

1,148,945

–

–

14(a)

4,983

906

–

–

12

1,780

1,124

–

–

Total non-current assets

1,639,611

1,154,074

655,844

581,135

Total assets

1,851,185

1,327,233

793,495

693,661

Deferred tax asset Other assets

Current liabilities Payables

18

29,838

18,059

3,332

3,629

44,457

38,242

–

–

19

34,415

30,325

34,415

30,325

Interest bearing debt

21

56,392

–

56,392

–

Current tax liabilities

20

749

1,884

745

1,871

165,851

88,510

94,884

35,825

Tenant deposits Distribution payable

Total current liabilities Non-current liabilities Payables

18

22,533

22,673

17,431

22,678

Derivative financial instruments

11

3,276

419

–

–

44,159

32,976

–

–

902,065

587,547

–

–

38,992

21,065

–

–

Total non-current liabilities

1,011,025

664,680

17,431

22,678

Total liabilities

1,176,876

753,190

112,315

58,503

Net assets

674,309

574,043

681,180

635,159

616,217

578,500

–

–

Tenant deposits Interest bearing debt

21

Deferred tax liabilities

14(b)

Equity Unitholders’ fund Contributed equity

22

614,030

576,367

Reserves

23

(115,000)

(122,688)

Undistributed income

24

173,469

119,418

64,963

56,658

672,511

573,109

681,180

635,159

1,810

946

–

–

674,309

574,043

681,180

635,159

Unitholders’ interest Minority interest Total equity

25

The Balance Sheets are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 97.

60

Statements of Cash Flow for the year ended 30 June 2008

Note

Cash flows from operating activities Property rental income received Property expenses paid Trust net property income received Realised foreign exchange gains Other non property expenses paid Financing costs

Trust

Year ended 30 Jun 07 $’000

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

109,413

76,492

–

–

(30,448)

(18,733)

–

–

78,965

57,759

–

–

17,298

4,254

17,298

8,390

(18,830)

(15,828)

(6,651)

(2,923)

(19,186)

(8,125)

(3,628)

Financing income

2,385

1,189

2,236

1,171

Japanese withholding tax paid

(12,771)

(3,750)

(12,771)

(3,711)

GST/consumption tax received

7,641

11,115

GST/consumption tax paid Net cash inflows/(outflows) from operating activities

(3,458) 30

Cash from investing activities Acquisition of investments

52,044 –

Acquisition of financial assets – RJT units

(4,620)

Capital expenditure Acquisition of investment properties, including acquisition costs Proceeds from the sale of associate Proceeds from the sale of investment properties Distributions received

Units bought back on-market

–

–

(3,516) (136,457)

2,927 (134,138)

(4,620)

–

–

–

–

–

78,060

–

–

129,750

–

–

–

3,181

146,350

63,440

1,230

–

–

(19,793) 463,133

Borrowing establishment costs

–

(371,531)

(589)

Proceeds from borrowings

–

–

54,119

Payment of transaction costs

–

(461,127)

(343,105)

Cash from financing activities Proceeds from issue of Units

(15) (1,746)

(3,969)

Net cash inflows/(outflows) from investing activities

34,522

(3,139)

–

Change in tenant deposits

(12,092)

–

(290,821)

5,273

(70,698)

114,454

54,119

114,454

(1,795) – 347,392

(589)

(1,758)

(19,793) 91,472

– 21,944

(2,460)

(2,900)

Repayment of borrowings

(99,948)

(133,704)

(35,000)

(21,605)

Distributions paid

(57,580)

(51,422)

(57,580)

(51,422)

Interest received on cross currency swaps

–

–

9,553

6,497

9,553

6,497

Net cash inflows/(outflows) from financing activities

346,435

278,522

42,182

68,110

Net increase in cash and cash equivalents

55,374

22,223

43,941

339

Cash and cash equivalents at the beginning of the financial year

82,524

72,723

5,942

5,977

Effect on exchange rate fluctuations on cash held Cash and cash equivalents at the end of the financial year

(1,959) 9

135,939

(12,422) 82,524

(493) 49,390

(374) 5,942

The Cash Flow Statements are to be read in conjunction with the Notes to the Financial Statements set out on pages 62 to 97.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Consolidated Year ended 30 Jun 08 $’000

61

Notes to the Financial Statements for the year ended 30 June 2008

1. Statement of significant accounting policies Babcock & Brown Japan Property Trust (the “Trust”) is a Trust domiciled in Australia. The consolidated financial report of the Trust for the year ended 30 June 2008 comprises the Trust and its subsidiaries (together referred to as the “Group”) and the consolidated entity’s interest in associates.

The financial report was authorised for issue by the Directors on 15 August 2008. The Responsible Entity has the power to amend and re-issue this financial report.

The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report includes separate Financial Statements for the Trust as an individual entity and the consolidated entity consisting of the Trust and its subsidiaries.

(A) Basis of preparation The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001.

Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial statements and notes comply with International Financial Reporting Standards (IFRS).

The financial report is presented in Australian dollars.

The financial report is prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities (including derivative financial instruments) at fair value through profit or loss and held for trading financial assets and investment property.

The preparation of Financial Statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Group’s accounting policies. The area involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the Financial Statements relates to deferred Japanese withholding tax and is disclosed in note 1K(iii).

The Trust is of a kind referred to in ASIC Class Order 98/100 (as amended) and in accordance with that Class Order, amounts in the financial report have been rounded off to the nearest thousand dollars, unless otherwise stated.

(B) Principles of consolidation (i) The Tokumei Kumiai (TK) The consolidated financial information of the Trust incorporates the beneficial interest in 100% of the assets and liabilities arising from the contractual relationships with JPT Co., Ltd., JPT Scarlett Co., Ltd., JPT Direct Co., Ltd., JPT Corporate Co., Ltd., JPT August Co., Ltd and JPT Endeavour Co., Ltd, all Japanese companies (TK Operators). These contractual relationships are known under Japanese commercial law as TKs. Under the contractual relationships the Trust is entitled to 99% of the profits and losses of the businesses of the TKs. Under Japanese commercial law a TK is not a legal entity but a contractual relationship or contractual relationships between one or more investors and the TK Operator.

The 1% of TK profit to which the TK Operator is entitled is shown as minority interests in the Consolidated Income Statement. The 1% of TK retained earnings to which the TK Operator is entitled is shown as minority interests in the Balance Sheet.

The consolidated financial information of the Trust incorporates the results of its interests in the TKs from the date on which the TK agreements were signed.

Investments in subsidiaries are accounted for at cost in the individual parent entity financial statements. (ii) Transactions eliminated on consolidation Intra-group balances and transactions are eliminated in preparing the consolidated Financial Statements.

Unrealised gains arising from transactions with associates are eliminated to the extent of the consolidated entity’s interest in the entity with adjustments made to the “Investment in associates” and “Share of associates net profit” accounts. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Gains and losses are recognised as the contributed assets are sold by the associates or, if not sold by the associate, when the consolidated entity’s interest in such entities is disposed of.

62

Notes to the Financial Statements for the year ended 30 June 2008

1. Statement of significant accounting policies (continued) (C) Segment reporting A segment is a distinguishable component of the consolidated entity that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

(D) Foreign currency (i) Functional and presentation currency Items included in the financial statements of each of the consolidated entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”).

The consolidated Financial Statements are presented in Australian dollars, which is the Trust’s functional and presentation currency. (ii) Transactions and balances Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation of monetary items are recognised in the Income Statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Australian dollars at foreign exchange rates ruling at the dates the fair value was determined. Refer to Note 26A(ii) for details of the Trust’s foreign exchange hedging policy. (iii) Foreign interests The beneficial interests in the assets and liabilities arising from the TKs and the Associate (in the prior year) are translated into Australian currency at rates of exchange current at balance date, while their income and expenditures are translated at the average of rates ruling during the financial period. Exchange differences arising on translation are taken to the foreign currency translation reserve.

Derivative financial instruments are recognised at fair value on the date the derivative contract is entered into and subsequently re-measured to their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged.

The Group has designated all interest rate swap derivatives as hedges of highly probable forecast transactions (cash flow hedges). The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the Income Statement.

The Group documents at inception of the hedging transaction the relationship between hedging instruments and hedged items as well as its risk management objectives and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in cash flows of hedged items.

Fair value of various derivatives financial instruments used for hedging purposes is disclosed in Note 26A(ii).

Amounts accumulated in equity are recycled in the Income Statement in the periods when the hedged item will affect profit or loss (for instance when the forecast interest payment that is hedged takes place).

When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the Income Statement when the forecast transaction is ultimately recognised in the Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Income Statement.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

(E) Derivative financial instruments The Group uses derivative financial instruments to economically hedge its exposure to foreign exchange risk and interest rate risk arising from operating, financing and investing activities.

63

Notes to the Financial Statements for the year ended 30 June 2008

1. Statement of significant accounting policies (continued) The cross currency derivative instruments (capital hedge, liability hedge and distribution hedge) do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the Income Statement.

The fair value of financial instruments that are not traded in an active market is determined using standard market valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the Balance Sheet date.

(F) Investment property Investment properties are properties which are held either to earn rental income or for capital appreciation or for both. Subsequent to the initial recognition of investment properties at cost including transaction costs, Investment properties are stated at fair value. An external, independent valuation company, having an appropriate recognised professional qualification and recent experience in the location and category of property being valued, values each property in the portfolio every three years unless the Board’s periodic review of fair value, which takes place at least at the end of each reporting period, indicates a change in fair value. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

The valuations are prepared by considering the aggregate of the net annual rents receivable from the properties and where relevant, associated costs. A yield which reflects the specific risks inherent in the net cash flows is then applied to the net annual rentals to arrive at the property valuation.

Valuations reflect, among other things; the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in occupation after letting of vacant accommodation and the market’s general perception of their credit-worthiness; the allocation of maintenance and insurance responsibilities between lessor and lessee; and the remaining economic life of the property. It has been assumed that whenever rent reviews or lease renewals are pending with anticipated reversionary increases, all notices and where appropriate counter notices have been served validly and within the appropriate time.

Any gain or loss arising from a change in fair value is recognised in the Income Statement.

(G) Cash and cash equivalents Cash and cash equivalents comprise Cash at bank, Cash on deposit, and Cash in trust. Bank overdrafts that are repayable on demand and form an integral part of the consolidated entity’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Cash in Trust relates to cash required to be reserved under debt covenants or by Trust Banks for tenant deposits, capital expenditure or interest payments.

(H) Transaction costs on issue of Units in the Trust Transaction costs arising on the issue of Units in the Trust are recognised directly in Unitholders’ funds as a reduction of the proceeds of Units to which the costs relate.

(I) Revenue Revenues are recognised at fair value of the consideration received net of the amount of recoverable goods and services tax (“GST”) or Japanese consumption tax payable to the taxation authority. Refer to Note 1K for further information. (i) Property rental income Rental income from investment property is recognised in the Income Statement on a straight line basis over the term of the lease. Lease incentives granted are recognised as an asset within Investment Property and amortised over the term of the lease. The amortisation is recorded against property income.

Recovery of outgoings as specified in lease agreements is accrued on an estimated basis and adjusted when the actual amounts are invoiced to the respective tenants.

64

Notes to the Financial Statements for the year ended 30 June 2008

1. Statement of significant accounting policies (continued) (ii) Disposal of assets Gain or loss on disposal of assets is calculated as the difference between the carrying amount of the asset at the date of disposal and the net proceeds from disposal and is included in the Income Statement in the year of disposal. Revenue obtained from the sale of properties is recognised when the significant risks and rewards have transferred to the buyer on exchange of unconditional contracts. (iii) Distribution income Distribution income is recognised in the Income Statement on the date the entity’s right to receive payment is established. (iv) Financing income Interest income is recognised in the Income Statement on a time proportionate basis, using the effective interest method.

All other revenue is recognised on an accruals basis.

(J) Expenses (i) Financing costs Financing costs comprise interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested. (ii) Asset management fees Asset management fees payable to the Responsible Entity are recognised as an expense as the services are received and for the performance fee component at fair value based on the performance of the Trust and the TKs relative to the performance criteria set out in the Trust Constitution.

(ii) Japanese withholding tax Effective as of 1 April 2002, all foreign corporations and non-resident individuals that do not have permanent establishments in Japan are subject to 20% withholding tax on the distribution of profits under TK contracts.

The 20% withholding tax is the final Japanese tax on such distributed TK profits and such profits are not subject to any other Japanese taxes (assuming that such investor is not a resident of/does not have permanent establishment in Japan).

The amount of profit that is allocated to TK investors under a TK agreement is immediately deductible from the TK operator’s taxable income regardless of whether a distribution to any TK investor is actually made at that time. The 20% withholding tax described above however, is only imposed on an actual distribution of profit to investors.

On a six monthly basis, once interest bearing debt service and required lender reserve payments have been made, the TK Operator will make cash distributions to the Trust. For the most part these distributions can be expected to be of income for Japanese tax purposes, and thus subject to withholding tax at a rate of 20%, however, the cash available for distribution from the TK may exceed taxable profit for Japanese tax purposes and may therefore be made in part free from Japanese withholding tax as either a return of capital or (if capital has already been fully returned) as a loan from the TK to the Trust.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

(K) Tax (i) Australian income tax Under current Australian income tax legislation, the Trust is not liable to income tax provided Unitholders are presently entitled to all of the Trust’s taxable income at 30 June each year and any taxable gain derived from the sale of an asset acquired after 19 September 1985 is fully distributed to Unitholders. Tax allowances for building, plant and equipment depreciation are distributed to Unitholders in the form of tax deferred components of distributions.

65

Notes to the Financial Statements for the year ended 30 June 2008

1. Statement of significant accounting policies (continued) (iii) Deferred Japanese tax Deferred tax assets and liabilities are recognised for timing differences at the tax rates expected to apply when assets are recovered or liabilities are settled based on the rate which is enacted or substantially enacted in Japan. The relevant tax rate is applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. The relevant rate currently is 20%.

Deferred tax assets are recognised for deductible temporary differences only if it is probable that future taxable amounts will be available to utilise those temporary differences. Deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.

Critical accounting estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Trust and that are believed to be reasonable under the circumstances.

Where the final tax outcome is different from the amounts that were initially recorded, such differences will impact the deferred tax provisions in the period in which the determination is made.

(L) Distributions Distributions are paid within three months of each half year end. The half year ends are 30 June and 31 December.

(M) Goods and services tax and Japanese consumption tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) or Japanese consumption tax (consumption tax), except where the amount of GST or consumption tax incurred is not recoverable from the Australian Tax Office (“ATO”) or Japanese tax authority (“tax authorities”). In these latter circumstances the GST or consumption tax is recognised as part of the cost of acquisition of the asset or as part of an item of the expense.

Receivables and payables are stated with the amount of GST or consumption tax included. The net amount of GST or consumption tax recoverable from, or payable to, the tax authorities is included as a current asset or liability in the Balance Sheet.

Cash flows are included in the Statement of Cash Flows on a gross basis. The GST or consumption tax components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the tax authorities are classified as operating cash flows.

(N) Trade and other payables Trade and other payables are recognised for amounts to be paid in the future for goods or services received, whether or not billed to the Trust and are stated at cost. Trade accounts payable are normally settled within 60 days.

(O) Provisions A provision is recognised when there is a legal, equitable or constructive obligation as a result of a past event and it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing or amount of which is uncertain.

If the effect is material, a provision is determined by discounting the expected future cash flows (adjusted for expected future risks) required to settle the obligation at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability, most closely matching the expected future payments. The unwinding of the discount is treated as part of the expense related to the particular provision.

(P) Interest bearing debt Interest-bearing borrowings are recognised initially at fair value of the consideration received less attributable transaction costs. Subsequent to initial recognition, interest-bearing debt is stated at amortised cost with any difference between proceeds and redemption value being recognised in the Income Statement over the period of the debt on an effective interest basis.

(Q) Receivables Trade and other receivables are stated at their cost less any impairment losses. Impairment losses are booked when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. An impairment loss is recognised for the amount by which the asset carrying amount exceeds its recoverable amount based on the present value of estimated future cash flows.

66

Notes to the Financial Statements for the year ended 30 June 2008

1. Statement of significant accounting policies (continued) (R) Tenant deposits Tenant deposit liabilities are recognised at fair value and classified as current or non-current based on the obligation to return the deposit to tenants.

(S) Earnings per Unit Basic earnings per Unit is determined by dividing net profit attributable to the Trust by the weighted average number of Units on issue during the financial year.

Diluted earnings per Unit is determined by dividing net profit attributable to the Trust by the weighted average number of ordinary Units and dilutive potential ordinary Units on issue during the financial year.

(T) Responsible Entity’s remuneration In accordance with the Trust Constitution, Babcock & Brown Japan Property Management Limited is entitled to receive an Asset Management Fee. The Asset Management Fee is made up of: • A Base Fee component which is based on an Asset Base Fee paid to Babcock & Brown Co., Ltd., (“the Japan Manager”) and a Trust Base Fee paid to the Responsible Entity.

• A Performance Fee component which comprises a fee in relation to the returns of the Japanese Investments (Asset Performance Fee) and a fee in relation to the returns of the Trust (Trust Performance Fee).

The Asset Management Fee is subject to a payment cap whereby the Asset Management Fee (being the aggregate of the Base Fee and the Performance Fee) paid in any one year must not exceed 1% of the value of the Trust’s direct and indirect proportionate interest in properties and other assets at the end of the year.

(i) Base fee • Asset Base Fee equal to 0.40% per annum of the gross market values of the properties calculated on the half year values of the properties and other assets subject to the TK Asset Management Agreement, and payable quarterly in arrears.

• Trust Base Fee of 0.50% per annum of the Trust’s direct or indirect proportionate interest in properties and other assets. The fee is calculated on half year values and payable in arrears. For so long as the Responsible Entity is a related entity of Babcock & Brown Limited, the Trust Base Fee is reduced by the Asset Base Fee paid to the Asset Manager, (which is a related body corporate of Babcock & Brown Limited) and the TK Operator’s share of profits of the TK. (ii) Performance fee • Asset Performance Fee is calculated in two tiers as follows: (a) Tier 1 – 5% of the amount (denominated in Japanese Yen) equivalent to the amount the internal rate of return of the Japanese Investments exceeds the Asset Benchmark (which is 10%) up to 1% out‑performance; and (b) Tier 2 – 15% of the amount (denominated in Japanese Yen) equivalent to the amount the internal rate of return of the Japanese Investments exceeds the Asset Benchmark in excess of 1% out-performance.

• Trust Performance Fee is calculated in two tiers as follows: (i) Tier 1 – 5% of out-performance of the ASX 200 Property Accumulation Index return (Benchmark) (up to 2%) multiplied by total equity of the Trust; and (ii) Tier 2 – 15% of out-performance of the Benchmark greater than 2% multiplied by total equity of the Trust.

The Trust performance fee is reduced by the sum of Tier 1 and Tier 2 Asset Performance Fee and if as a result of this reduction the Trust Performance Fee is less than zero, the Trust Performance fee will be taken to be zero.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Any excess will be carried forward into future years and will be payable to the extent to which the Asset Management Fee payable in any subsequent year is less than the 1% cap. Any excess which has been carried forward for at least three years is then payable and this payment of outstanding fees will not be capped. Accordingly, it is possible that the payment of the Asset Management Fee within a year could exceed 1% of the Trust’s assets, particularly after periods where there has been three years of cumulative out‑performance.

67

Notes to the Financial Statements for the year ended 30 June 2008

1. Statement of significant accounting policies (continued) (U) New accounting standards and UIG interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2008 reporting periods. The Group’s assessment of the impact of these new standards and interpretations is set out below.

AASB 8 Operating Segments and AASB 2007-3 Amendments to Australian Accounting Standards arising from AASB 8 AASB 8 and AASB 2007-3 are effective for annual reporting periods commencing on or after 1 January 2009. AASB 8 will result in a significant change in the approach to segment reporting, as it requires adoption of a “management approach” to reporting on the financial performance. The information being reported will be based on what the key decision-makers use internally for evaluating segment performance and deciding how to allocate resources to operating segments. The Group has not yet decided when to adopt AASB 8.

Application of AASB 8 may result in different segments, segment results and different type of information being reported in the segment note of the financial report. However, it will not affect any of the amounts recognised in the financial statements.

Revised AASB 101 Presentation of Financial Statements and AASB 2007-8 Amendments to Australian Accounting Standards arising from AASB 101 The revised AASB 101 that was issued in September 2007 is applicable for annual reporting periods beginning on or after 1 January 2009. It requires the presentation of a statement of comprehensive income and makes changes to the statement of changes in equity but will not affect any of the amounts recognised in the financial statements. If an entity has made a prior period adjustment or a reclassification of items in the financial statements, it will also need to disclose a third balance sheet (statement of financial position), this one being as at the beginning of the comparative period.

Revised AASB 3 Business Combinations, AASB 127 Consolidated and Separate Financial Statements and AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 Revised accounting standards for business combinations and consolidated financial statements were issued in March 2008 and are operative for annual reporting periods beginning on or after 1 July 2009, but may be applied earlier. The Group has not yet decided when it will apply the revised standards. However, the new rules generally apply only prospectively to transactions that occur after the application date of the standard.

Their impact will therefore depend on whether the Group will enter into any business combinations or other transactions that affect the level of ownership held in the controlled entities in the year of initial application.

For example, under the new rules: • all payments (including contingent consideration) to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments subsequently remeasured at fair value through income • all transaction costs will be expensed • the Group will need to decide whether to continue calculating goodwill based only on the parent’s share of net assets or whether to recognise goodwill also in relation to the non-controlling (minority) interest, and • when control is lost, any continuing ownership interest in the entity will be remeasured to fair value and a gain or loss recognised in profit or loss.

68

Notes to the Financial Statements for the year ended 30 June 2008

1. Statement of significant accounting policies (continued) Amendments to IFRS 1 and IAS 27 Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate In May 2008, the IASB made amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards and IAS 27 Consolidated and Separate Financial Statements. The new rules will apply to financial reporting periods commencing on or after 1 January 2009. Amendments to the corresponding Australian Accounting Standards are expected to be issued shortly. The Group will apply the revised rules prospectively from 1 July 2009. After that date, all dividends received from investments in subsidiaries, jointly controlled entities or associates will be recognised as revenue, even if they are paid out of pre-acquisition profits, but the investments may need to be tested for impairment as a result of the dividend payment. Furthermore, when a new intermediate parent entity is created in internal reorganisations it will measure its investment in subsidiaries at the carrying amounts of the net assets of the subsidiary rather than the subsidiary’s fair value.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

IFRIC Interpretation 16 Hedges of a Net Investment in a Foreign Operation IFRIC Interpretation 16 was issued in July 2008 and applies to reporting periods commencing on or after 1 October 2008. The interpretation clarifies which foreign currency risks qualify as hedged risk in the hedge of a net investment in a foreign operation and that hedging instruments may be held by any entity or entities within the group. It also provides guidance on how an entity should determine the amounts to be reclassified from equity to profit or loss for both the hedging instrument and the hedged item. The Group will apply the interpretation prospectively from 1 July 2009. There will be no changes to the accounting for the existing hedge of the net investment in 30 June 2008.

69

Notes to the Financial Statements for the year ended 30 June 2008

2. net financing costs Consolidated

Trust

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

2,301

1,133

2,236

1,115

–

56

–

56

2,301

1,189

2,236

1,171

22,701

9,780

3,502

59

126

177

126

177

22,827

9,957

3,628

236

3. Distributions Received Distributions from TKs – Related Party

–

–

77,137

36,112

Distributions from associate (KDTMK)

–

–

–

1,721

–

–

77,137

37,833

4,681

28,647

4,681

28,647

784

50,061

784

50,061

3,204

–

3,204

–

8,669

78,708

8,669

78,708

Financing income Interest income Interest compensation – Related Party Financing costs Interest on borrowings Arrangement fee

4. GAIN/(LOSS) ON DERIVATIVES Gain Gain on capital hedges Gain on distribution hedges Gain on liability hedges Loss Realised loss on foreign exchange derivatives Realised loss on equity swap

(334) (1,680) (2,014)

(584) – (584)

(334) (1,680) (2,014)

(584) – (584)

6,655

78,124

6,655

78,124

459

367

–

–

613

487

302

209

5. OTHER OPERATING EXPENSES Other operating expenses includes the following: Accounting fees Audit fees

70

Regulatory and registrar costs

273

218

273

218

Other miscellaneous

249

236

255

146

1,594

1,308

830

573

Notes to the Financial Statements for the year ended 30 June 2008

6. INCOME TAX EXPENSE Consolidated

Trust

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

(a) Income tax expense Current Japanese withholding tax

10,238

4,728

10,238

4,728

Deferred Japanese withholding tax

14,598

4,472

–

–

24,836

9,200

10,238

4,728

(b) Reconciliation of tax expense Profit for the period

147,961

138,975

86,150

120,064

Tax at the Australian tax rate of 30%

44,388

41,693

25,845

36,019

Tax effect of amounts that are not assessable

(44,388)

(41,693)

(25,845)

(36,019)

Japanese withholding tax on distributions from Japanese investments

10,238

4,728

10,238

4,728

Deferred Japanese tax liability on investment properties and associate (Note 14B)

18,157

4,731

–

–

Deferred Japanese tax asset on investment properties and associate (Note 14A)

(3,559)

(260)

–

–

Japanese tax expense

14,598

4,472

–

–

24,836

9,200

10,238

4,728

–

–

(c) Amounts recognised directly in equity Net deferred tax arising in the reporting period and not recognised in net profit or loss but directly debited to equity

(748)

(332)

$

$

$

$

Audit and review of financial reports

301,623

208,795

301,623

208,795

PricewaterhouseCoopers Japan: Audit and review of financial reports

311,190

278,356

–

–

612,813

487,151

301,623

208,795

Audit services: Auditors of the Group PricewaterhouseCoopers Australia:

Other services: Auditors of the Group PricewaterhouseCoopers Tax advisory services

124,612

71,232

65,375

–

Taxation compliance services

150,145

119,208

45,299

15,161

274,757

190,440

110,674

15,161

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

7. AUDITOR’S REMUNERATION

71

Notes to the Financial Statements for the year ended 30 June 2008

8. earnings per unit Consolidated Year ended 30 Jun 08

Year ended 30 Jun 07

Basic and diluted earnings per ordinary Unit

23.65¢

26.71¢

Profit attributable to Unitholders used in calculating basic and diluted earnings per share ($’000)

121,627

129,195

514,293,475

483,759,511

Weighted average number of Units used as denominator in calculating basic and diluted earnings per Unit

The weighted average number of Units used as denominator in calculating basic and diluted earnings per Unit shown above is based on the number of Units on issue during the period.

9. cash and cash equivalents Consolidated

Cash at bank Cash on deposit Cash in Trust Cash and cash equivalents in the Statements of Cash Flows and Balance Sheets 10. trade and other receivables Current Rent receivable Consumption tax and GST receivable Distribution receivable – Related Party Other receivables

Trust

30 Jun 08 $’000

30 Jun 07 $’000

30 Jun 08 $’000

30 Jun 07 $’000

36,371

23,438

9,303

245

40,087

5,697

40,087

5,697

59,481

53,389

–

–

135,939

82,524

49,390

5,942

1,776

1,459

–

–

3,958

8,084

241

–

–

–

19,774

27,238

1,327

779

–

–

7,061

10,322

20,015

27,238

11. derivative financial instruments Current assets Net interest receivable on cross currency swaps

4,904

2,868

4,904

2,868

Cross currency swaps (Capital hedges) at fair value

16,598

23,505

16,598

23,505

Cross currency swaps (Liability hedge) at fair value

1,222

–

1,222

–

42,225

52,973

42,225

52,973

64,949

79,346

64,949

79,346

1,839

2,990

–

–

3,276

419

–

–

Forward foreign exchange contracts (Distribution hedges) at fair value

non-Current asset Interest rate swaps at fair value Non-current liability Interest rate swaps at fair value

Refer to Note 26 Financial Risk Management for further details of the risk exposures relating to derivative financial instruments.

72

Notes to the Financial Statements for the year ended 30 June 2008

12. other assets Consolidated

Trust

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

328

967

–

–

1,780

1,124

–

–

1,890

–

1,890

–

current Prepayments Non-current Prepayments 13. other financial assets current Rubicon Japan Property Trust units (21,000,000 units at $0.09) Non-current Investments in TKs – held at cost Other investments

–

–

655,844

581,135

98

109

–

–

98

109

655,844

581,135

100

153

–

–

Share issue expense Interest rate swaps

655

84

–

–

Investment properties

4,228

669

–

–

Deferred tax assets

4,983

906

–

–

906

613

–

–

Movements: Opening balance at the beginning of the year

518

33

–

–

Credited to the Income Statement

Credited to equity

3,559

260

–

–

Closing balance at the end of the year

4,983

906

–

–

Deferred tax to be recovered after more than 12 months

4,983

906

–

–

38,624

20,467

–

–

368

598

–

–

38,992

21,065

–

–

21,065

16,633

–

–

(b) Deferred tax liabilities The balance comprises temporary differences attributable to: Investment properties Interest rate swaps Deferred tax liability Movements: Opening balance at the beginning of the year Credited to equity

– (299)

–

–

18,157

4,731

–

–

Closing balance at the end of the year

38,992

21,065

–

–

Deferred tax to be settled after more than 12 months

38,992

21,065

–

–

Charged to the Income Statement

(230)

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

14. deferred taxes (A) Deferred tax assets The balance comprises temporary differences attributable to:

73

Notes to the Financial Statements for the year ended 30 June 2008

15. INVESTMENTS IN ASSOCIATES ACCOUNTED FOR USING THE EQUITY METHOD Consolidated Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Trust Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

(a) Movements in carrying amount Carrying amount at the beginning of the financial period

–

94,214

Purchase of additional 18% investment in associate

–

–

Dividends received

–

(3,181)

Share of net profit of associate

–

3,928

Effect of changes in exchange rates

–

(12,660)

Disposal of interest in KDTMK

–

(82,301)

–

–

(b) Share of associates profits Property income

–

9,371

Property expenses

–

(4,123)

Net property income

–

5,248

Financing expenses

–

(936)

Other expenses

–

(384)

Share of net operating income

–

3,928

Fair value adjustments to investment property

–

–

Share of associates net profit recognised

–

3,928

Discount on acquisition of 18% interest in associate

–

–

–

3,928

–

(4,240)

(C) loss on disposal of associate Loss on disposal of interest in KDTMK

74

Notes to the Financial Statements for the year ended 30 June 2008

16. INVESTMENT PROPERTIES Consolidated

Trust

30 Jun 08 $’000

30 Jun 07 $’000

30 Jun 08 $’000

30 Jun 07 $’000

1,630,911

1,148,945

–

–

Carrying amount at the beginning of the period

1,148,945

944,629

–

–

Acquisitions including acquisition costs

480,582

422,215

–

–

3,140

1,746

–

–

Investment properties at fair value a) Reconciliation Reconciliation of the carrying amount of investment properties is set out below:

Capital expenditure Disposals

1

(88,994)

(19,368)

–

–

Change in fair value of investment properties

62,846

20,626

–

–

Foreign currency translation differences

24,392

(220,903)

–

–

–

–

Carrying amount at the end of the period

1,148,945

Includes the acquisition and revaluation of interest in Kawasaki Dice property which was previously held by an associate.

(b) Amounts recognised in net profit for investment property Property rental income

109,849

76,581

–

–

Property expenses

(32,486)

(18,418)

–

–

77,363

58,163

–

–

(c) Valuation basis The basis of valuation of investment properties is fair value being amounts for which the properties could be exchanged between willing parties in an arm’s length transaction, based on current prices in an active market for similar properties in the same location and condition and subject to similar leases. The Directors’ assessment of fair value was based upon independent assessments made by Japanese Licensed Real Estate Appraisers.

(D) Assets pledged as security Refer to Note 21 for information on assets pledged as security. (e) Beneficial interest The Trust holds interests in the investment properties arising from the contractual relationship between the Trust and the TK Operator. The beneficial legal ownership of the investment properties is held in the name of the TK Operator.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

1

1,630,911

75

Notes to the Financial Statements for the year ended 30 June 2008

17. LEASING ARRANGEMENTS The investment properties are leased to tenants under two main types of leases in Japan, standard leases and fixed term leases. Standard leases are usually for two years. The tenant has the right of renewal on the lease and the contractually agreed cancellation notice period by the tenant is usually six months.

Fixed term leases may be cancellable or non-cancellable and lease terms vary between tenants. Subsequent renewals are negotiated with the lessee. Property interests held under operating leases are classified as investment properties. No contingent rents are charged.

Consolidated 30 Jun 08 $’000

Trust

30 Jun 07 $’000

30 Jun 08 $’000

30 Jun 07 $’000

The minimum lease payments receivable on fixed term non-cancellable leases of investment properties not recognised in the Financial Statements as receivables are as follows: 16,451

14,722

–

–

Later than one year but not later than 5 years

Within one year

58,346

56,872

–

–

Later than 5 years

101,230

109,270

–

–

176,027

180,914

–

–

7,232

4,984

–

–

3,117

1,472

–

–

12,082

7,284

914

3,271

7,407

4,319

2,418

358

29,838

18,059

3,332

3,629

22,533

22,673

17,431

22,678

22,533

22,673

17,431

22,678

19. DISTRIBUTIONS PAID AND PAYABLE Interim distribution paid

33,193

28,353

33,193

28,353

Final distribution payable at year end

34,415

30,325

34,415

30,325

67,608

58,678

67,608

58,678

18. PAYABLES Current Property rental income received in advance Interest payable Fees payable to related parties (Note 31) Other payables

non-Current Fees payable to related parties (Note 31)

(a) Ordinary Units Final distribution for the year ended 30 June 2008 of 6.72 cents per Unit (2007 – 6.15 cents) payable on 3 September 2008 (2007 – 31 August 2008).

Interim distribution for the year ended 30 June 2008 of 6.33 cents per Unit (2007 – 5.75) paid in February 2008 (2007 – February 2007).

20. CURRENT TAX LIABILITIES Japanese withholding tax

76

749

1,884

745

1,871

Notes to the Financial Statements for the year ended 30 June 2008

21. INTEREST BEARING LOANS AND BORROWINGS Consolidated

Trust

30 Jun 08 $’000

30 Jun 07 $’000

30 Jun 08 $’000

30 Jun 07 $’000

56,392

–

56,392

–

902,065

587,547

–

–

current Secured bank loans NON-current Secured bank loans

Bank loans are denominated in Yen (94%) and AUD (6%) and are interest only loans with principal repayable on maturity and a weighted average term to expiry of 3.1 years. After interest rate swaps, 69% of the loans are fixed at a rate of 2.10% p.a., with the remaining 31% floating debt with a current rate of 1.77% p.a. (a) Assets pledged as security The bank loans are secured by pledge over the investment properties.

The carrying amount of assets pledged as security for non-current interest bearing debt are: Investment properties at fair value

1,630,911

1,148,945

–

–

902,065

587,547

–

–

Unsecured bank loans

56,392

–

56,392

–

Unsecured bank loan facility

23,608

–

23,608

–

Total facilities available

982,065

587,547

80,000

–

Facilities utilised at reporting date

958,457

587,547

56,392

–

23,608

–

23,608

–

Secured bank loans

Facilities not utilised at reporting date

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

(b) Financing facilities The consolidated entity has access to the following lines of credit:

77

Notes to the Financial Statements for the year ended 30 June 2008

22. contributed equity Consolidated

Trust

30 Jun 08 No. of units

30 Jun 07 No. of units

30 Jun 08 No. of units

30 Jun 07 No. of units

508,672,564

493,096,223

508,672,564

493,096,223

493,096,223

428,796,223

493,096,223

428,796,223

–

64,300,000

–

64,300,000

30,000,000

–

30,000,000

–

1,282,576

–

1,282,576

–

4,639,034

–

4,639,034

–

Units bought back on-market and cancelled – December 2007 – June 2008

(17,881,484)

–

(17,881,484)

–

Units bought back on-market but not paid and cancelled – 30 June 2008

(2,463,785)

–

(2,463,785)

–

508,672,564 Units on issue (2007 – 493,096,223) Movements in number of Units Number at beginning of financial year Placements issued 23/8/06 August 2007 institutional placement – Units allotted 3/09/07 Unitholder purchase plan – Units allotted 23/10/07 Distribution reinvestment plan – Units allotted 29/2/08

Number at end of financial year Movements in contributed equity Balance at beginning of financial year

508,672,564

493,096,223

508,672,564

493,096,223

$’000

$’000

$’000

$’000

576,367

463,755

578,500

465,805

Units issued

60,057

114,454

60,057

114,454

On-market buy-back

(19,794)

–

(19,793)

–

(1,958)

–

(1,958)

–

On-market buy-back – units not paid and cancelled at 30 June 2008 Transaction costs Balance at end of financial year

(642) 614,030

(1,842) 576,367

(589) 616,217

(1,759) 578,500

Under the terms of the Trust’s Constitution, Units are classified as equity. Issue costs are recognised as a reduction of the proceeds of issues.

In accordance with the Trust’s Constitution, each ordinary Unitholder is entitled to receive distributions as declared from time to time and is entitled to one vote per Unit at Unitholder meetings. In accordance with the Trust’s Constitution, each Unit represents a right to an individual share in the Trust and does not extend to a right to the underlying assets of the Trust.

In August 2007 the Group issued 30,000,000 units at $1.73 each as part of an institutional placement.

The units were allotted on 3 September 2007.

On 23 October 2007 1,282,576 units were allotted under a Unitholder purchase plan at $1.73 per unit.

As part of the December 2007 half year distribution to Unitholders, a distribution reinvestment plan was activated, with 4,639,034 units allotted on 29 February 2008 for a total of $5,938,000 at $1.28 per unit.

Between December 2007 and June 2008 the Trust purchased and cancelled 17,881,484 of its own units as part of an on-market buy-back. The units were purchased at an average price of $1.11 per unit, with prices ranging from $0.78 to $1.40. The total cost of $19,793,000 was deducted from contributed equity.

At 30 June 2008 three buy-back orders totalling $1,958,000, had been made but had not been paid for and were subsequently cancelled.

Refer Note 33 Events Occurring After the Balance Sheet Date for details of on-market buy-backs post year end.

At the 30 June 2008 reporting date there was an on-market buy-back in place.

78

Notes to the Financial Statements for the year ended 30 June 2008

23. reserves Consolidated

Foreign currency translation reserve Hedging reserve – cash flow hedges

Foreign currency translation reserve Balance at beginning of financial year Currency translation differences arising during the year Balance at the end of the financial year

Trust

30 Jun 08 $’000

30 Jun 07 $’000

(114,220)

(125,102)

(780)

2,414

30 Jun 08 $’000

30 Jun 07 $’000

–

–

–

–

(115,000)

(122,688)

–

–

(125,102)

(5,323)

–

–

10,882

(119,779)

–

–

(114,220)

(125,102)

–

–

The translation reserve comprises all foreign exchange differences arising from the translation of the interests in foreign operations, where their functional currency is different to the presentation currency of the reporting entity. hedging reserve Balance at beginning of financial year Revaluation

2,414

3,569

–

–

(3,995)

(1,533)

–

–

378

–

–

2,414

–

–

Deferred tax recognised directly in equity

801

Balance at the end of the financial year

(780)

24. UNDISTRIBUTED INCOME Undistributed income at the beginning of the financial year

119,418

48,901

56,658

–

Net profit attributable to Unitholders

121,627

129,195

75,912

115,336

32

–

–

–

Adjustment for minority interest of movement in reserves Distributions paid and payable

(67,608)

(58,678)

(67,608)

(58,678)

Undistributed income at the end of the financial year

173,469

119,418

64,962

56,658

25. minority interests Balance at the beginning of the financial year Net profit attributable to minority interest Minority interest of movement in reserves

946

497

–

–

1,498

580

–

–

–

–

–

–

–

–

–

(32)

Distributions payable

(602)

Balance at the end of the financial year

1,810

(131) 946

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in equity. Amounts are recognised in profit and loss when the associated hedge transaction affects profit and loss.

79

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT The Group’s principal financial instruments comprise cash, receivables, derivative financial instruments, payables, tenant deposits, distributions payable and interest bearing debt.

The Group’s activities are exposed to a variety of financial risks: market risk (including currency risk, interest rate risk, and equity price risk), credit risk and liquidity risk.

This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk and the Group’s management of capital. Further quantitative disclosures are included through these consolidated financial statements.

The Board of Directors has overall responsibility for the establishment and oversight of Group’s risk management framework. The Board has established the Audit, Risk & Compliance Committee (ARCC), which is responsible for monitoring the identification and management of key risks to the business. The ARCC meets regularly and reports to the Board of Directors on its activities.

The responsibility for operational risk management has been delegated by the Board to the Treasury Management Committee (TMC), which operates in line with policies approved by the Board of Directors.

The Board has established a Treasury Policy outlining principles for overall risk management and policies covering specific areas, such as mitigating foreign exchange, interest rate and liquidity risks. The Treasury Policy was amended in August 2007 to provide management with more flexibility to manage the exchange rate and interest rate exposures.

The Group’s Treasury Policy provides a framework for managing the financial risks of the Trust with a key philosophy of risk mitigation. Derivatives are exclusively used for hedging purposes, not as trading or other speculative instruments. The Group uses derivative financial instruments such as foreign exchange contracts, cross currency swaps and interest rate swaps to hedge certain risk exposures.

The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risks, ageing analysis for credit risk and cash flow forecasting for liquidity risk.

There have been no significant changes in the types of financial risks; or the Group’s risk management program (including methods used to measure the risks) since the prior year. (a) Market risk Market risk refers to the potential for changes in the value of the Group’s financial instruments or revenue streams from changes in market prices. There are various types of market risks to which the Group is exposed including those associated with interest rates, currency rates and equity market prices. (i) Interest rate risk Interest rate risk refers to the potential fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates.

As at reporting date, the Trust had the following interest bearing assets and liabilities: 30 Jun 08

30 Jun 07

Balance $’000

Weighted Avg Interest Rate %

Balance $’000

7.70%

49,390

5.75%

5,942

Liabilities Interest bearing debt – floating

8.29%

56,500

–

–

Interest rate risk managed by – cross currency swaps

(6.91)%

–

–

–

1.38%

56,500

–

–

TRUST

Weighted Avg Interest Rate %

assets Cash and cash equivalents

Total exposure to cash flow interest rate risk

80

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT (continued) (i) Interest rate risk (continued) As at reporting date, the Group had the following interest bearing assets and liabilities: 30 Jun 08

consolidated

Weighted Avg Interest Rate %

30 Jun 07

Balance $’000

Weighted Avg Interest Rate %

Balance $’000

Assets Cash and cash equivalents – Balances held in Australia

7.70%

49,390

5.75%

5,942

– Balances held in Japan

0.20%

86,549

0.13%

76,582

Total cash and cash equivalents

135,939

82,524

Liabilities Interest bearing debt – Fixed

1.30%

183,209

1.30%

177,488

– Floating

2.40%

782,143

1.51%

414,415

Total interest bearing debt

2.19%

965,352

1.45%

591,903

Interest rate risk managed by: – Fixed debt

1.30%

(183,209)

1.30%

(177,488)

– Interest rate swaps (notional principal amount)

2.40%

(484,000)

2.21%

(277,990)

– Cross currency swap

(6.91)%

–

–

–

Total interest rate risk management

1.39%

(667,209)

1.85%

(455,478)

Total exposure to cash flow interest rate risk

1.86%

298,143

1.62%

136,425

An analysis of maturities is provided in Note 26(c)

The Group manages its interest rate risk by using fixed rate debt, or interest rate swaps to fix interest rates.

Interest rate swaps have the economic effect of converting variable rate borrowings to fixed rates. Under the interest rate swaps the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to agreed notional principal amounts. The Group is willing to forgo the potential economic benefit that could result in a falling interest rate environment to protect its downside risks and improve the predictability of cash flows generated from assets by fixing rates.

Swaps are currently in place over approximately 73% (2007: 67%) of the TK’s floating rate borrowings and have an average term to expiry of 3.6 years (2007: 6.4 years). The fixed interest rates are 1.53% and 3.36% (2007: between 1.53% and 3.36%) and the variable rates are between 1.52% and 2.32% (2007: 1.27% to 1.85%).

The contracts require settlement of net interest payables quarterly. The settlement dates coincide with the dates on which interest is payable on the underlying debt. The contracts are settled on a net basis.

The fair value of the interest rate swaps at 30 June 2008 is $1,839,000 non-current asset (30 June 2007 $2,990,000), $nil current liability (30 June 2007: $nil) and $3,276,000, non-current liability (30 June 2007: $419,000).

The gain or loss from remeasuring the instruments at fair value is deferred in equity in the hedging reserve, to the extent the hedge is effective, and re-classified into profit and loss when the hedged interest expense is recognised. There is no ineffective portion to these hedges recognised in the Income Statements.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

The Group’s interest rate risk primarily arises from external borrowings. The Group’s policy is to fix interest rates for between 50% to 100% of its borrowings, including its share of borrowings from associates.

81

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT (continued) (i) Interest rate risk (continued) Interest Rate Sensitivity Trust Sensitivity At reporting date if Australian interest rates had been 50bps higher/lower and all other variables were held constant, the impact on the Trust would be: Increase by 50 bps

Net profit/(loss) Capital hedge Liability hedge Interest bearing debt Total net profit/(loss) Equity

Decrease by 50 bps

2008 $’000

2007 $’000

2008 $’000

2007 $’000

(3,641)

(2,349)

3,721

2,401

(68) – (3,709)

–

68

–

–

–

–

3,789

2,401

–

–

(2,349)

–

–

At reporting date if Japanese interest rates had been 20bps higher/lower and all other variables were held constant, the impact on the Trust would be: Increase by 20 bps

Net profit/(loss) Capital hedge Liability hedge Interest bearing debt Total net profit/(loss) Equity

Decrease by 20 bps

2008 $’000

2007 $’000

2008 $’000

2007 $’000

1,438

732

(1,452)

(739)

27

–

(27)

–

(113)

–

113

–

1,352

732

–

–

(1,366)

(466)

–

–

Group Sensitivity At reporting date if Australian interest rates had been 50bps higher/lower and all other variables were held constant, the impact of the Group would be: Increase by 50 bps

Net profit/(loss) Capital hedge Liability hedge Interest bearing debt Total net profit/(loss) Equity

Decrease by 50 bps

2008 $’000

2007 $’000

2008 $’000

2007 $’000

(3,641)

(2,349)

(68) – (3,709)

3,721

2,401

–

68

–

–

–

–

3,789

2,401

–

–

(2,349)

–

–

At reporting date if Japanese interest rates had been 20bps higher/lower and all other variables were held constant, the impact of the Group would be: Increase by 20 bps

Net profit/(loss) Capital hedge Liability hedge

82

Decrease by 20 bps

2008 $’000

2007 $’000

2008 $’000

2007 $’000

1,438 27

732

(1,452)

(739)

–

(27)

–

Interest bearing debt

(596)

(273)

596

273

Total net profit/(loss)

869

459

(883)

(466)

Interest rate swap

3,876

2,907

(3,924)

(2,951)

Total equity

3,876

2,907

(3,924)

(2,951)

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT (continued) (ii) Currency risk The Group’s principal activity is investing in interests in Japanese real estate, and as a result the Group is exposed to currency risk with respect to movements in the AUD/JPY exchange rate.

Currency risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the Trust’s functional currency, Australian dollars, and from net investments in foreign operations. The risk is measured using cash flow forecasting and sensitivity analysis.

The Group seeks to mitigate the effect of currency exposure on the Balance Sheet by borrowing in Japanese Yen. Capital hedges With respect to the equity capital of the Trust, the policy is to arrange cross currency interest rate swap hedges equivalent to between 20%–40% of its net investment in Japanese assets (2007: 10%–30%), over periods of between four and six years.

At balance date the Trust had cross currency interest rate swap hedges of A$146.5 million with staggered settlement dates between August 2009 and August 2014. Interest is paid at six monthly intervals.

Maturity

Trust sells Japanese Yen ’000

2008 1 – 5 years

Average Exchange rate

Australian Interest rate

Japanese interest rate

14,462,505

87.9

6.24%

0.94%

Greater than 5 years

7,685,480

94.9

6.71%

1.51%

2007 1 – 5 years

9,014,865

84.6

6.00%

0.84%

3,586,400

89.7

6.15%

1.11%

Greater than 5 years

Distribution hedges The Group adopts a policy of arranging foreign exchange forward hedges on a rolling basis equivalent to: 2008

2007

Years 1 – 3

60% to 100%

100%

Years 4 – 5

50% to 90%

90%

0% to 75%

–

Years 5 – 10 At balance date the details of outstanding balances are: Trust sells Japanese Yen ’000

Average Exchange rate

2008 Less than 1 year

4,319,030

73.8

1 – 5 years

11,204,517

69.1

2007 Less than 1 year

3,326,753

78.6

1 – 5 years

14,196,946

70.4

Maturity

These distribution hedging arrangements are economic hedges and do not qualify for hedge accounting.

The fair value of the distribution hedging arrangements at 30 June 2008 is $42,225,334 current asset (30 June 2007: $52,973,000 current asset).

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

These capital hedging arrangements are economic hedges and do not qualify for hedge accounting. The fair value of the capital hedging arrangements at 30 June 2008 is $21,501,554 current asset (30 June 2007: $2,747,000 current asset) and nil current liability (30 June 2007: $562,000).

83

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT (continued) (ii) Currency risk (continued) At reporting date if the AUD/JPY foreign exchange rate had been 10% higher/lower and all other variables were held constant, the impact of the Group would be: CONSOLIDATED

Increase by 10%

Decrease by 10%

2008 $’000

2007 $’000

Net profit/(loss) Capital hedge

19,837

10,812

(24,254)

(13,215)

Distribution hedges

15,106

18,120

(18,961)

(22,802)

Liability hedge

4,993

–

(6,104)

39,936

28,933

(49,319)

–

–

Total net profit/(loss) Equity

2008 $’000

2007 $’000

– (36,017)

–

–

At reporting date if the AUD/JPY foreign exchange rate had been 10% higher/lower and all other variables were held constant, the impact of the Trust would be: TRUST

Decrease by 10%

2007 $’000

Net profit/(loss) Capital hedge

19,837

10,812

(24,254)

(13,215)

Distribution hedges

15,106

18,120

(18,961)

(22,802)

Liability hedge

4,993

–

(6,104)

39,936

28,933

(49,319)

–

–

Total net profit/(loss) Equity

84

Increase by 10% 2008 $’000

2008 $’000

–

2007 $’000

– (36,017) –

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted.

Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Consolidated

Cash and other cash equivalents Trade and other receivables Derivative financial instruments – current

Trust

2008 $’000

2007 $’000

2008 $’000

2007 $’000

135,939

82,524

49,390

5,942

7,061

10,322

20,015

27,238

64,949

79,346

64,949

79,346

Derivative financial instruments – non-current (interest rate swaps)

1,839

2,990

–

–

Other financial assets

1,988

109

1,890

–

211,776

175,291

136,244

112,526

Where entities have a right of set-off and intend to settle on a net basis under netting arrangements, this set‑off has been recognised in the financial statements on a net basis. Details of the Group’s contingent liabilities are disclosed in Note 33.

The Group does not have any significant credit risk exposure to a single tenant. Initial and ongoing credit evaluation is performed on the financial condition of our tenants and, where appropriate, an allowance for doubtful receivables is raised. No allowance has been recognised for the consumption tax, GST and distribution receivable from the taxation authorities and related parties respectively. Based on historical experience, there is no evidence of default from these counterparties which would indicate that an allowance is necessary.

The Trust and Group are also exposed to credit risk arising from our transactions in cross currency swaps, interest rate swaps and foreign exchange contracts. The Treasury Policy outlines the counterparty credit risk management policy, including limits per financial institution. Derivative counterparties and cash transactions are limited to financial institutions that meet minimum credit rating criteria in accordance with policy requirements.

Impairment losses The ageing of trade and other receivables at reporting date is detailed below: Consolidated

Not past due

Trust

2008 $’000

2007 $’000

2008 $’000

2007 $’000

6,568

10,121

20,015

27,238

Past due 0 – 30 days

342

155

–

–

Past due 31 – 60 days

25

13

–

–

Past due 61+ days

126

33

–

–

7,061

10,322

20,015

27,238

Total

Group policy requires tenants to pay rent in accordance with agreed payment terms, which is generally one month in advance. Trade and other receivables have been aged according to their due date in the above ageing analysis. Based on past experience, the Trust and Group believes that no impairment allowance is necessary in respect of rent receivables not past due and past due. The rent receivables past due are not significant and we hold security for the rent receivables in the form of a right of set off against the liability for tenant deposits in the event a tenant defaults. During 2007 and 2008, the tenant deposits we called upon were insignificant. During 2007 and 2008 for the Trust and Group there were no renegotiations of the terms of trade and other receivables.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Trade and other receivables consist of rent, consumption tax, GST, distributions and other receivables.

At balance date 56% (2007: 78%) of the Group’s receivables were due from Japanese and Australian tax authorities in respect of consumption tax and GST. For the Trust 99% (2007: 100%) of receivables were distributions from the related party TKs, which are receivable in Japanese Yen. At balance date there were no other significant concentrations of credit risk.

85

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT (continued) (C) Liquidity risk The Trust manages liquidity risk by maintaining sufficient cash including working capital and other reserves.

The following are the undiscounted contractual cash flows of derivatives and non-derivative financial liabilities shown at their nominal amounts.

Trust $’000 – 2008 Less than 1 year

Non-derivative financial liabilities Payables

(3,332)

1 to 2 years

(17,431)

2 to 5 years

More than 5 years

Contractual cash flows

Carrying amount

–

–

(20,763)

(20,763)

Distribution payable

(34,415)

–

–

–

(34,415)

(34,415)

Current tax liabilities

(745)

–

–

–

(745)

(745)

(56,500)

–

–

–

(56,500)

(56,392)

(406)

–

–

–

(406)

102,144

268,807

Interest bearing debt Principal Interest

–

Current derivative financial instruments Gross settled – Inflow – Outflow Total current derivative financial instruments

74,274 (45,111)

(66,370) (194,439)

29,163

35,774

Less than 1 year

1 to 2 years

74,368

85,821

531,046

(76,679) (382,599) 9,142

– –

148,448

64,949

Contractual cash flows

Carrying amount

Trust $’000 – 2007

Non-derivative financial liabilities Payables

(3,629)

(6,585)

2 to 5 years

(16,093)

More than 5 years

–

(26,307)

(26,307)

Distribution payable

(30,325)

–

–

–

(30,325)

(30,325)

Current tax liabilities

(1,871)

–

–

–

(1,871)

(1,871)

Interest bearing debt Principal

–

–

–

–

–

Interest

–

–

–

–

–

285,674

– –

Current derivative financial instruments Gross settled

86

– Inflow

61,427

63,872

– Outflow

(39,213)

(39,259) (195,020)

Total current derivative financial instruments

22,214

24,613

90,654

43,067

454,040

(34,791) (308,283) 8,276

145,757

– – 79,346

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT (continued) (C) Liquidity risk (continued) Consolidated entity $’000 – 2008 Less than 1 year

Non-derivative financial liabilities Payables (29,838) Tenant deposits

(22,533)

More than 5 years

–

–

(10,806)

Contractual cash flows

(52,371)

(52,371)

(88,615)

(88,615)

–

–

–

(34,415)

(34,415)

Current tax liabilities

(749)

–

–

–

(749)

(749)

(56,500) (183,209) (725,643) (16,874)

NON-Current derivative financial instruments (assets and liabilities) Net settled (interest rate swaps) 1,733 Total interest liability

(15,856)

(24,244)

(1,900)

(4,444)

(32,425)

Carrying amount

(34,415)

Interest

(928)

2 to 5 years

Distribution payable Interest bearing debt Principal

(44,456)

1 to 2 years

– (965,352) (958,457) –

(56,974)

(4,471)

(9,082)

–

(1,383)

(15,141)

(17,756) (28,688)

(4,471) (66,056)

–

74,274

102,144

85,821

–

Current derivative financial instruments (assets and liabilities) Gross settled – Inflow – Outflow

(45,111)

Total current derivative financial instruments

268,807

(66,370) (194,439)

29,163

35,774

Less than 1 year

1 to 2 years

74,368

531,047

(76,679) (382,599) 9,142

–

148,448

64,949

Contractual cash flows

Carrying amount

Non-derivative financial liabilities Payables (18,059) Tenant deposits

(38,242)

2 to 5 years

(6,585)

(16,093)

(229)

(6,178)

More than 5 years

– (26,569)

(40,737)

(40,737)

(71,218)

(71,218)

Distribution payable

(30,325)

–

–

–

(30,325)

(30,325)

Current tax liabilities

(1,884)

–

–

–

(1,884)

(1,884)

Interest bearing debt Principal

(2,696)

– (589,207)

Interest

(8,574)

(8,533)

(14,850)

NON-Current derivative financial instruments (assets and liabilities) Net settled (interest rate swaps) (1,566)

(1,666)

(4,532)

(10,199)

(19,382)

285,674

Total interest liability

(10,140)

– –

(591,903) (587,547) (31,957)

–

(13,726)

2,571

(5,962) (45,683)

–

43,067

–

(5,962)

Current derivative financial instruments (assets and liabilities) Gross settled – Inflow

61,427

63,872

– Outflow

(39,213)

(39,259) (195,020)

Total current derivative financial instruments

22,214

24,613

90,654

454,040

(34,791) (308,283) 8,276

145,757

– 79,346

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Consolidated entity $’000 – 2007

87

Notes to the Financial Statements for the year ended 30 June 2008

26. FINANCIAL RISK MANAGEMENT (continued) (d) Capital risk management The Group maintains its capital structure with the objective of safeguarding the Trust’s ability to continue as a going concern, to increase the returns for Unitholders and to maintain an optimal capital structure. The capital structure of the Group consists of interest bearing debt, as listed in Note 21, and equity as listed in Note 22. The analysis of each of these categories of capital is provided in these Notes.

To achieve the optimal capital structure, the Board may use the following strategies: amend the distributions policy of the Trust; issue new units through a private or public placement; activate or suspend the Distribution Reinvestment Program (DRP); issue units under a Unit Purchase Plan (UPP); conduct an on‑market buyback of units, acquire debt, and dispose of investment properties.

The Trust targets gearing (interest bearing debt/investment properties) within a target range of 50% to 60%.

The Trust’s gearing ratio temporarily increased to 60.8% at 31 December 2007 from 51.1% at 30 June 2007 due to debt funded acquisitions. Gearing was subsequently reduced to 58.9% at 29 February 2008 following the repayment of a $35 million bridge facility. The Board approved the temporary increase in the gearing above the target range due to the strength of the interest cover ratio of 4.6 times. The weighted average interest rate of the Group’s debt was 2.0% at 30 June 2008 (30 June 2007: 1.9%).

The Trust maintains a conservative interest rate hedging policy, which requires interest rates to be fixed for between 50% to 100% of debt. As at 30 June 2008 the average duration of interest rate hedging was 3.6 years, compared to 4.6 years at 30 June 2007.

Other than described above, there were no further changes in our approach to capital management during the year. (e) Fair values of financial assets and liabilities Fair values All financial assets and liabilities have been recognised at the balance date at their carrying values which are not materially different from the fair values.

The following methods and assumptions are used to determine the net fair values of financial assets and liabilities.

Recognised Financial Instruments Cash and cash equivalents, trade and other receivables and payables The carrying amount represents fair value because their short-term to maturity means no discounting is required.

Interest-bearing liabilities The Trust’s financial assets and liabilities included in current and non-current assets and liabilities on the statement of financial position are carried at amounts that approximate fair value.

Non-current investments and securities For financial instruments traded in organised financial markets, fair value is the current quoted market bid price for an asset or offer price for a liability. For investments where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows or the underlying net asset base of the investment/security.

Derivative financial instruments The fair value of interest rate swaps and cross currency swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates. This value is then discounted back to balance sheet date. The fair value of derivative equity contracts is determined based on the current quoted market bid price.

27. CONTINGENT ASSETS In the opinion of the Directors of the Responsible Entity there were no contingent assets at end of the reporting period.

88

Notes to the Financial Statements for the year ended 30 June 2008

28. CONSOLIDATED ENTITIES Country of incorporation

Parent entity Babcock & Brown Japan Property Trust

Ownership interest

Australia

30 Jun 08

30 Jun 07

Japan

100%

100%

Significant investments Tokumei Kumiais (TKs) established under the Tokumei Kumiai Agreements dated: 24 March 2005 with JPT Co., Ltd. 29 November 2005 with JPT Scarlett Co., Ltd.

Japan

100%

100%

28 August 2006 with JPT Direct Co., Ltd.

Japan

100%

100%

29 September 2006 with JPT Corporate Co., Ltd.

Japan

100%

100%

6 September 2007 with JPT August Co., Ltd.

Japan

100%

–

The Responsible Entity is a party to five separate Tokumei Kumiai Agreements with the respective TK Operators above, pursuant to which, in exchange for the Trust’s contribution of all the equity required for the TK Businesses, the Trust is entitled to 100% of the investor capital account of the TK and 99% of the profits and losses of the TK Businesses.

29. SEGMENT REPORTING The Group’s primary reporting format is business segments by sub-market within the real estate sector, retail, residential and office property and corporate and the secondary format is geographical.

2008 Revenue Property rental income Financing income Total segment revenue

Corporate $’000

Total Operations $’000

6,305

–

109,849

–

2,301

2,301

6,305

2,301

112,150

–

62,846

Retail $’000

Office $’000

Residential $’000

50,676

52,868

–

–

50,676

52,868

Fair value adjustments to investment property

12,247

61,531

Disposal of investment property

13,770

26,534

–

–

40,304

–

–

–

17,943

17,943

Total segment revenue and other income

76,693

140,933

(4,627)

20,244

233,243

Results Segment result

62,478

123,731

(5,696)

(32,552)

Profit before income tax and minority interest

(5,696)

Other income

(10,932)

147,961

62,478

123,731

Income tax expense

–

–

Profit for the period

62,478

123,731

663,769

835,071

132,070

–

1,630,911

Other segment assets

103,301

30,313

2,825

83,835

220,274

Total segment assets

767,070

865,384

134,895

83,835

1,851,185

–

–

–

958,457

958,457

Other segment liabilities

54,591

42,329

2,824

118,674

218,419

Total segment liabilities

54,591

42,329

2,824

1,077,131

1,176,876

Assets and liabilities Investment properties

Interest bearing liabilities

– (5,696)

(32,552)

147,961

(24,836)

(24,836)

(57,388)

123,125

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Business segments The following table presents revenue and profit information and certain assets and liability information regarding business segments for the year ended 30 June 2008.

89

Notes to the Financial Statements for the year ended 30 June 2008

29. SEGMENT REPORTING (CONTinued) Geographical segments The following table presents revenue and profit information and certain assets and liability information regarding geographical segments for the year ended 30 June 2008.

Australia $’000

Eliminations $’000

Total Operations $’000

109,849

–

–

109,849

65

2,236

–

2,301

–

77,137

(77,137)

Total segment revenue

109,914

79,373

(77,137)

Fair value adjustments to investment property

62,846

–

Disposal of investment properties

40,304 – 213,064

97,316

(77,137)

233,243

Results Segment result

138,947

86,151

(77,137)

147,961

Profit before income tax and minority interest

138,947

86,151

(77,137)

147,961

Income tax expense

(24,836)

Japan $’000

2008 Revenue Property rental income Financing income Distributions received

Other income Total segment revenue and other income

Net profit for the period

112,150

–

62,846

–

–

40,304

17,943

–

17,943

– 86,151

– (77,137)

(24,836) 123,125

Assets and liabilities Investment properties

1,630,911

–

Other segment assets

103,805

792,087

(675,618)

220,274

Total segment assets

(675,618)

1,851,185

–

1,630,911

1,734,716

792,087

Interest bearing liabilities

902,066

56,392

Other segment liabilities

183,677

55,923

(21,182)

218,419

1,085,743

112,315

(21,182)

1,176,876

Total segment liabilities

90

114,111

–

–

958,457

Notes to the Financial Statements for the year ended 30 June 2008

29. SEGMENT REPORTING (CONTinued) Business segments Office $’000

Residential $’000

Corporate $’000

Total Operations $’000

34,984

39,132

2,465

–

76,581

–

–

1,189

1,189

39,132

2,465

1,189

77,770

Financing income Total segment revenue Fair value adjustments to investment property

34,984

25,873

–

–

20,626

3,928

–

–

–

3,928

–

–

–

80,809

80,809

Total segment revenue and other income

33,665

65,005

2,465

81,998

183,133

Results Segment result

22,297

53,842

2,081

60,755

138,975

Profit before income tax and minority interest

22,297

53,842

2,081

60,755

138,975

Share of net profits of associates Other income

(5,247)

Income tax expense

(4,684)

Profit for the period

17,613

49,578

1,829

60,755

129,775

Assets and liabilities Investment properties

619,715

496,571

32,659

–

1,148,945

Other segment assets

28,895

22,304

717

126,372

178,288

Total segment assets

648,610

518,875

33,376

126,372

1,327,233

Interest bearing liabilities

(4,264)

(252)

–

(9,200)

–

–

–

587,547

587,547

Other segment liabilities

49,894

29,102

805

85,842

165,643

Total segment liabilities

49,894

29,102

805

673,389

753,190

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

2007 Revenue Property rental income

Retail $’000

91

Notes to the Financial Statements for the year ended 30 June 2008

29. SEGMENT REPORTING (CONTinued) Geographical segments Japan $’000

Australia $’000

Eliminations $’000

Total Operations $’000

76,581

–

–

76,581

18

1,171

–

1,189

–

36,112

(36,112)

–

Total segment revenue

76,599

37,283

(36,112)

77,770

Fair value adjustments to investment property

20,626

–

–

20,626

3,928

–

–

3,928

–

80,809

–

80,809

Total segment revenue and other income

101,153

118,092

(36,112)

183,133

Results Segment result

60,886

104,259

(26,170)

138,975

Profit before income tax and minority interest

60,886

104,259

(26,170)

138,975

2007 Revenue Property rental income Financing income Distributions received

Share of net profits of associates Other income

Income tax expense

(9,200)

Net profit for the period

51,686

104,259

1,148,945

–

93,001

668,897

(583,610)

178,288

1,241,946

668,897

(583,610)

1,327,233

Interest bearing liabilities

587,547

–

Other segment liabilities

134,378

58,504

(27,239)

165,643

Total segment liabilities

721,925

58,504

(27,239)

753,190

Assets and liabilities Investment properties Other segment assets Total segment assets

92

–

– (26,170) –

–

(9,200) 129,775 1,148,945

587,547

Notes to the Financial Statements for the year ended 30 June 2008

30. NOTES TO THE STATEMENTS OF cash flows Consolidated

Trust

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

123,125

129,775

75,912

115,336

412

1,570

503

1,636

Reconciliation of profit after income tax to net cash flows from operating activities Adjustments for non cash items and items classified as investing or financing activities Realised foreign exchange gain Unrealised fair value adjustment to derivatives

16,432

Equity accounting for investment in associates

–

Fair value adjustments to investment property Distributions received Interest received on cross currency swaps Loss on movement in financial assets – RJT units Gain on sale of associate Net cash provided by operating activities before changes in asset and liabilities

(62,846) – (13,569)

(65,164) 314 (20,626) – (7,329)

(77,137)

(37,833)

(13,569)

(7,329)

2,730 –

66,284

38,540

4,871

(3,663)

(1,450)

(28)

(1,506)

(9,906)

(6,512)

Net cash from operating activities

–

–

Increase/(decrease) in trade and other receivables

Increase/(decrease) in financial assets – RJT units

–

–

5,450

Increase/(decrease) in other assets

–

–

(2,533)

1,890

–

52,044

34,522

(65,164)

–

2,730

Change in assets and liabilities during the financial period Increase/(decrease) in Japanese withholding tax payable

(Increase/(decrease) in payables

16,432

– (4,142) 2,504

(2,533)

1,018

(409)

1,950

– (7,334) 1,890 (3,515)

– (2,545) – 2,927

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Profit for the period

93

Notes to the Financial Statements for the year ended 30 June 2008

31. RELATED PARTIES (a) Responsible entity The Responsible Entity of Babcock & Brown Japan Property Trust is Babcock & Brown Japan Property Management Limited (ACN 111 874 563) (“the Responsible Entity”) whose immediate and ultimate holding company is Babcock & Brown Australia Pty Limited (ABN 49 002 348 521) and Babcock & Brown Limited (ABN 53 108 614 955) respectively. (b) Responsible entity’s holdings of Units The Responsible Entity holds 4,000,000 Units (0.8%) directly in the Trust. As at 30 June 2008, the Babcock & Brown Group and its associates held 20,774,694 Units (4.1%) in the Trust, which includes the Responsible Entity’s holding as above. (c) Key management personnel (a) Directors The names of each person holding the position of Director of the Responsible Entity during the financial year were Mr F A McDonald, Mr E Lucas, Mr P Green, Ms P Dwyer and Mr J Pettigrew. (b) Other key management personnel The following person had authority and responsibility for planning, directing and controlling activities of the consolidated entity, directly or indirectly, during the financial year: Name

Position

Employer

A Saridas

Chief Financial Officer

Babcock & Brown Australia (from August 2007 until July 2008)

M A Calcarao

Financial Controller

Babcock & Brown Australia (until April 2008)

I C Hay

Financial Controller

Babcock & Brown Australia (from April 2008)

(d) Unit holdings The number of Units in the Trust held during the financial year by each Director of Babcock & Brown Japan Property Management Limited and other key management personnel, including their personally related parties, in the issued capital of the Trust at the date of this report are set out below. There were no Units issued during the year as compensation.

Balance at start of year

Change during the year

Other changes during year

Balance at end of year

240,000

–

–

240,000

Eric Lucas

6,123,706

842,587

–

6,966,293

Phil Green

1,530,927

–

–

1,530,927

–

200,000

–

150,000

Name

Allan McDonald

Paula Dwyer

250,000

John Pettigrew

150,000

–

15,155

3,782

–

–

Michelle Calcarao Ian Hay

(50,000)

(18,937) 8,000

– 8,000

(e) Key management personnel compensation Key management personnel are paid by the Responsible Entity. Payments made by the Trust to the Responsible Entity do not include any amounts attributable to the compensation of key management personnel. (f) Key management personnel loan and option disclosures There were no loans or Babcock & Brown Japan Property Trust options granted as part of key management personnel remuneration in respect to their positions as key management personnel. (g) Other transactions with the Trust The terms and conditions of the transactions with key management personnel and their related entities were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel related entities on an arm’s length basis.

94

Notes to the Financial Statements for the year ended 30 June 2008

31. RELATED PARTIES (continued) (h) Responsible Entity and related party fees and other transactions The following transactions occurred with related parties: Trust

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Year ended 30 Jun 08 $’000

Year ended 30 Jun 07 $’000

Asset management fees Trust base fee – payable to Responsible Entity

2,463

1,180

2,463

1,180

Asset base fee – payable to Japan Asset Manager

6,583

4,499

–

–

9,046

5,679

2,463

1,180

14,509

2,101

–

–

Asset management performance fees Asset management performance fee – payable to Japan Asset Manager

23,555

7,780

2,463

1,180

Asset performance fee rebate – receivable from the Responsible Entity

(5,400)

(2,101)

(5,400)

(2,101)

Asset Management Fees paid or payable to the Responsible Entity and related parties excluding TK distribution to TK Operator

18,155

5,679

(2,937)

(921)

602

131

18,757

5,810

–

288

–

288

Reimbursement of administration expenses – paid to the Responsible Entity

62

43

62

43

Reimbursement of administration expenses – paid to the Asset Manager

145

–

–

–

Custody fees

223

162

223

162

–

–

77,137

36,112

Distributions from associate KDTMK

–

3,181

–

1,721

Interest compensation revenue

–

56

–

56

TK distribution – payable to TK Operator Total Asset Management Fees paid or payable to the Responsible Entity and related parties Transaction fees – paid to the Responsible Entity

Distributions from TKs

– (2,937)

– (921)

Interest expense paid to Babcock & Brown

–

59

–

59

Arrangement fee paid to Babcock & Brown

–

177

–

177

5,800

3,368

–

–

Underwriting fee paid to Babcock & Brown

240

–

240

–

Project facilitator fees payable to Babcock & Brown

325

–

325

–

Transactions fees paid to Japan Asset Manager

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

Consolidated

95

Notes to the Financial Statements for the year ended 30 June 2008

31. RELATED PARTIES (continued) (h) Responsible Entity and related party fees and other transactions (continued) Outstanding balances The following balances are outstanding at the reporting date in relation to transactions with related parties: Consolidated 30 Jun 08 $’000

Asset management fees Trust base fee – payable to Responsible Entity

30 Jun 08 $’000

30 Jun 07 $’000

914

302

914

302

1,686

1,229

–

–

51

94

–

–

Total base fees

2,651

1,625

914

302

Performance fees – payable to Responsible Entity

17,431

25,602

17,431

25,602

Asset performance fees – payable to Japan Asset Manager

14,533

2,685

–

–

Total performance fees

31,964

28,287

17,431

25,602

Asset management fees payable to the Responsible Entity and related parties

34,615

29,912

18,282

25,904

62

45

62

45

–

241

–

–

Asset base fee – payable to Japan Asset Manager TK distribution – payable to TK Operator

Custody fees payable to related party Transaction fees payable to Japan Asset Manager Reimbursement of trust expenses Project facilitator fees payable to Babcock & Brown Distributions receivable from TKs

96

Trust

30 Jun 07 $’000

–

9

–

9

325

–

325

–

–

–

19,775

27,238

Notes to the Financial Statements for the year ended 30 June 2008

32. CONTINGENT LIABILITIES Contingent Capital Contributions JPT Direct Co., Ltd. The Responsible Entity is a party to a TK Agreement with JPT Direct Co., Ltd. (“JPTD”). Under the TK Agreement, JPTD may request the Trust to contribute additional capital up to ¥2,500,000,000 ($24,618,000 at 30/6/08 JPY/AUD exchange rate of 101.55) (“Additional Capital Contribution”) in the event that JPTD has not met its monetary obligations under the ISDA Master Agreement (the “ISDA Agreement”) between JPTD and UBS AG, Tokyo (“UBS AG”).

No liability was recognised by the Trust in relation to the Additional Capital Contribution as the fair value of the Additional Capital Contribution is estimated to be nil.

At 30 June 2008 JPTD had met all its monetary obligations under the ISDA Agreement.

In the opinion of the directors of the Responsible Entity there were no other contingent liabilities at balance date.

33. EVENTS OCCURRING AFTER THE BALANCE SHEET DATE Monetisation of cross currency swaps On 31 July 2008 the capital hedge portfolio was reset by unwinding the pre-existing capital hedges and establishing new capital hedges for approximately 20.4% of the Trust’s net investment in Japanese assets (previously 39%). This resulted in net cash realised of $18,819,000. At 30 June 2008 the value of the pre‑existing cross currency swaps was $21,502,000.

On-market unit buy-back On signing of this financial report, the Trust had purchased an additional 460,403 units since reporting date for a total consideration of $325,000 under the on-market buy-back program announced on 22 November 2007.

Babcock & Brown Japan Property Trust Annual Report 2008 – Financial Statements

34. ECONOMIC DEPENDENCY The Trust is not significantly dependent on any specific entity for its revenue or financial requirements.

97

Directors’ Declaration

1. In the opinion of the Directors of Babcock & Brown Japan Property Management Limited, the Responsible Entity of Babcock & Brown Japan Property Trust: a) the Financial Statements and Notes, set out on pages 58 to 97 are in accordance with the Corporations Act 2001, including: i) giving a true and fair view of the financial position of the Trust and the Consolidated Entity as at 30 June 2008 and of its performance, as represented by the results of its operations and its cash flows, for the year ended 30 June 2008; and ii) complying with Accounting Standards and the Corporations Regulations 2001; and b) there are reasonable grounds to believe that the Trust will be able to pay its debts as and when they become due and payable.

2. The Trust has operated during the year in accordance with the provisions of the Trust Constitution dated 31 January 2005 (as amended from time to time).

3. The Register of Unitholders has, during the year ended 30 June 2008, been properly drawn up and maintained so as to give a true account of the Unitholders of the Trust.

4. The Directors of the Responsible Entity have been given the declarations by the Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2008 pursuant to section 295A of the Corporations Act 2001.

Dated at Sydney this 15 August 2008.

Signed in accordance with a resolution of the Directors:

F A McDonald Chairman

98

Independent Auditor’s Report

PricewaterhouseCoopers ABN 52 780 433 757 Darling Park Tower 2 201 Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone +61 2 8266 0000 Facsimile +61 2 8266 9999

Independent auditor’s report to the unitholders of Babcock & Brown Japan Property Trust Report on the financial report We have audited the accompanying financial report of Babcock & Brown Japan Property Trust (the registered scheme), which comprises the balance sheet as at 30 June 2008, and the income statement, statement of changes in equity and cash flow statement for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for both Babcock & Brown Japan Property Trust and the Babcock & Brown Japan Property Trust Group (the consolidated entity). The consolidated entity comprises the registered scheme and the entities it controlled at the year's end or from time to time during the financial year.

The directors of the Babcock & Brown Japan Property Management Limited (the responsible entity) are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards.

Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

Liability limited by a scheme approved under Professional Standards Legislation

Babcock & Brown Japan Property Trust Annual Report 2008 – Independent AUditor’s Report

Directors’ responsibility for the financial report

99

Independent Auditor’s Report (continued)

Independent auditor’s report to the unitholders of Babcock & Brown Japan Property Trust (continued) Our procedures include reading the other information in the Annual Report to determine whether it contains any material inconsistencies with the financial report.

For further explanation of an audit, visit our website http://www.pwc.com/au/financialstatementaudit.

Our audit did not involve an analysis of the prudence of business decisions made by directors or management.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

Auditor’s opinion In our opinion: (a)

(b)

the financial report of Babcock & Brown Japan Property Trust is in accordance with the Corporations Act 2001, including: (i)

giving a true and fair view of the registered scheme’s and consolidated entity’s financial position as at 30 June 2008 and of their performance for the year ended on that date; and

(ii)

complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and

the consolidated financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 1.

PricewaterhouseCoopers

AJ Wilson Partner

100

Sydney 15 August 2008

ASX Additional Information

Additional information required by the Australian Securities Exchange and not shown elsewhere in this report is as follows. The information is current as at 1 September 2008.

Substantial Unitholders The names of substantial Unitholders who have notified the trust in accordance with section 671B of the Corporations Act 2001 are: Unitholder

Macquarie Group Limited APN Funds Management Limited

Number of Units

Percentage %

Date notice received

41,647,378

8.03

18/02/08

30,935,806

6.74

12/06/08

Holders

Ordinary Shares

333

177,511

Distribution of Units Category

1 – 1,000 1,001 – 5,000

971

3,012,734

5,001 – 10,000

783

6,046,844

10,001 – 100,000 100,00 – and over Total

1,254

35,132,788

160

463,842,284

3,501

508,212,161

The number of Unitholders holding less than a marketable parcel is 197.

On-Market Buy-Backs The Trust currently has an on-market buy-back in place. To date the Trust has acquired and cancelled 20,805,672 units.

Number and Class of Units that are Restricted or Subject to Voluntary Escrow There are no ordinary Units in the Trust which are subject to voluntary escrow.

Babcock & Brown Japan Property Trust Annual Report 2008 – ASX Additional Information

Voting Rights At meetings of Unitholders of the Trust, on a show of hands each Unitholder will have one vote. On a poll, each Unitholder has one vote for each dollar of the value of the total interests that they have in the Trust (determined by reference to the closing price on the trading immediately before the day on which the poll is taken).

101

ASX Additional Information (continued)

Twenty Largest Unitholders Units Held

Percentage of Ordinary Units Held

HSBC Custody Nominees (Australia) Limited

86,767,523

17.07

J P Morgan Nominees Australia Limited

52,746,365

10.38

National Nominees Limited

50,743,185

9.98

Citicorp Nominees Pty Limited

45,648,191

8.98

Name

ANZ Nominees Limited <Cash Income A/C>

36,408,833

7.16

RBC Dexia Investor Services Australia Nominees Pty Limited <APN A/C>

31,921,262

6.28

UBS Wealth Management Australia Nominees Pty Ltd

12,170,272

2.39

Bond Street Custodians Limited <Property Securities A/C>

12,015,194

2.36

Cogent Nominees Pty Ltd

11,471,604

2.26

Bond Street Custodians Limited <ENH Property Securities A/C>

9,090,652

1.79

8,141,506

1.60

Suncorp Custodian Services Pty Ltd <AET> RBC Dexia Investor Services Australia Nominees Pty Limited

7,230,406

1.42

Citicorp Nominees Pty Limited <CFS WSLE Property Secs A/C>

6,097,885

1.20

UBS Nominees Pty Ltd

5,857,392

1.15

HSBC Custody Nominees (Australia) Limited - A/C 2

5,253,995

1.03

RBC Dexia Investor Services Australia Nominees Pty Limited <PIPOOLED A/C>

4,589,192

0.90

Cogent Nominees Pty Ltd <SMP Accounts>

4,164,868

0.82

Babcock & Brown Japan Property Management Limited AMP Life Limited Citicorp Nominees Pty Limited <CFSIL CFS WS INDX PROP A/C> Total

102

4,000,000

0.79

3,951,671

0.78

2,938,553

0.58

401,208,549

78.92%

Ownership Structure

BJT’s interest in the properties in Japan is achieved via an investment structure (“Japanese Investments”), as follows: The tokumei kumiai (“TK”) Structure Under Japanese commercial law a TK is not a legal entity but a contractual relationship or a series of contractual relationships between one or more investors and a TK Operator.

In a TK arrangement, the investors provide capital to a business which is defined by the contractual agreement and is to be conducted by the TK Operator, which carries on the TK business entirely in its own name and under its sole control in accordance with the terms of the TK Agreement. The investors have no right to make any business decisions with respect to the TK business. Investors in a TK do not own any equity in the TK Operator and have no voting rights in relation to a TK Operator or the TK business; rather, there is only a contractual relationship between a TK Operator and the investors.

The investors are entitled to a proportional share (based on their equity contribution to the TK) of the profits and losses of the TK business. Depending on the terms of the TK Agreement, liability of the investors can be limited to the amount of their initial investment or the investors can be subject to additional capital calls.

The net effect of these contractual arrangements under Japanese tax law is that the investors are taxed in Japan on their share of TK income (by the TK Operator withholding Japanese tax from TK distributions to the investors) even though the business is conducted and relevant assets are held in the name of the TK Operator.

A TK Operator reports the amount of profits to which the investors are entitled as a deduction in respect of its taxable income.

The TK Operators have a TK Asset Management Agreement with Babcock & Brown Co., Ltd. (“the Japan Manager”). The asset management services provided by the Japan Manager to the TK Operators are to assist the TK Operators to conduct the TK Businesses.

BJT does not own any of the equity of the TK Operators and does not have any voting rights in relation to the TK Operators or the TK Businesses, rather BJT has a contractual claim against the TK Operators.

The TK Operators are Japanese limited liability companies established specifically for the purpose of operating the respective TK Businesses. In order for the TK Operators to be bankruptcy remote, their voting stock is held by Cayman Islands companies established specifically for that purpose as nominees for Babcock & Brown Co., Ltd. and, in turn, the voting stock of the Cayman Islands companies are held by Cayman Islands charitable trusts.

Trust Bank(s) and Trust Beneficiary Interests The TK Operators primarily hold the beneficial interest in the properties in the TKs under a trust beneficiary certificate issued by a trust bank licensed in Japan which holds legal title to the properties. It is common practice in Japan for a TK Operator to hold its investment in property through Trust Beneficiary Interests (“TBIs”). Certain transaction levies are substantially reduced or eliminated in the case of the acquisition of a TBI rather than the acquisition of real property.

In the case where the TK Operator holds TBIs rather than direct legal interest, the TK Operator effectively has the same economic rights and obligations as if it were the legal owner of the property the subject of the TBI.

Babcock & Brown Japan Property Trust Annual Report 2008 – Ownership Structure

TK Investment All BJT’s interests in properties are held through TK structures. The Responsible Entity has TK Agreements with JPT Co., Ltd., JPT Scarlett Co., Ltd., JPT Direct Co., Ltd., JPT Corporate Co., Ltd., JPT Endeavour Co. Ltd., and JPT August Co., Ltd (“TK Operators”) pursuant to which, in exchange for BJT’s contribution of all of the equity in the TK, BJT is entitled to 100% of the investor capital account of each TK and 99% of the profits and losses of the TK business. The TK Operators are entitled to the remaining 1% of the profits and losses of the TK business. Each TK’s defined business is to obtain profits from purchasing, holding and selling the properties held by the respective TK Operator in accordance with the provisions of the respective TK Agreement (each, a “TK Business”).

103

Ownership Structure (continued)

The Financial Instruments and Exchange Law (“FIEL”) was introduced in Japan on 30 September 2007.

Under the FIEL, the Japan Manager is required to have certain licenses for the purposes of conducting discretionary asset management business, providing advice on the value of securities or financial instruments, and trading/brokering of trade of securities with low liquidity such as trust beneficial interests over real estate and interests in TK investments. On 19 August 2008 the Kanto Local Finance Bureau granted the Japan Manager the following licences: “Investment Management Business”; “Investment Advisory and Agency Business”; and “Second Type Financial Instruments and Exchange Business”. The Japan Manager is now registered as a financial instruments firm which is fully compliant with the FIEL in respect of its business activities, and the TK Operators are also in compliance with the FIEL. The following diagram sets out the structure of BJT’s interest in its Japanese Investments and the management arrangements for BJT and the Japanese Investments.

Babcock & Brown Group

Unitholders

Babcock & Brown Japan Property Trust

Responsible Entity

TKs

Japan Manager

Trust Beneficiary Interest(s)

Trust Bank(s)

Properties

104

Corporate Directory

Contents

PRINCIPAL REGISTERED OFFICE Level 23, The Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia

1

Highlights

24 New Properties

2

Chairman’s Report

33 Corporate Governance Statement

4

Managing Director’s Report

47 Directors’ Report

8

Review of Results & Operations

57 Financial Statements

10 Senior Management

98 Directors’ Declaration

12

99 Independent Auditor’s Report

Acquisitions & Asset Management

15 Portfolio Overview

101 ASX Additional Information

22 Property Locations

103 Appendix – Ownership Structure

RESPONSIBLE ENTITY BABCOCK & BROWN JAPAN PROPERTY MANAGEMENT LIMITED Level 23, The Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia T: +61 2 9229 1800 F: +61 2 9216 1752 CUSTODIAN BABCOCK & BROWN ASSET HOLDINGS PTY LIMITED Level 23, The Chifley Tower 2 Chifley Square Sydney NSW 2000 Australia DIRECTORS OF RESPONSIBLE ENTITY Allan McDonald (Chairman) Eric Lucas (Managing Director) Phil Green Paula Dwyer John Pettigrew COMPANY SECRETARY OF RESPONSIBLE ENTITY Melanie Hedges

About Babcock & Brown Japan Property Trust The Babcock & Brown Japan Property Trust (“BJT” or ”the Trust”) was the first Australian listed property trust with the strategy of investing solely in the real estate market of Japan.

BJT was established on 31 January 2005, became a registered scheme under the Corporations Act 2001 on 17 February 2005 and listed on the Australian Securities Exchange on 4 April 2005.

Initial equity of A$280 million was raised and interests in a diversified portfolio of 12 office and retail properties located in the central and greater Tokyo area were acquired for ¥47 billion (approximately A$600 million).

At 30 June 2008 BJT held interests in a portfolio comprising 44 office, retail and residential properties with a book value of ¥166 billion (approximately A$1.6 billion).

The Responsible Entity of BJT is Babcock & Brown Japan Property Management Limited (ABN 94 111 874 563) (“BBJPML”) (a subsidiary of Babcock & Brown Limited). Asset management services in Japan are generally undertaken by Babcock & Brown Co., Ltd. (also a subsidiary of Babcock & Brown Limited).

UNIT REGISTrar LINK MARKET SERVICES LIMITED Level 12, 680 George Street Sydney NSW 2000 Australia T: 1800 881 098 (within Australia) T: +61 2 8280 7699 (outside Australia) F: +61 2 9287 0303 ASX Code: BJT Email: registrars@linkmarketservices.com.au www.linkmarketservices.com.au AUDITORS PRICEWATERHOUSECOOPERS 201 Sussex Street Sydney NSW 1171 Australia INTERNET ADDRESS www.bbjapanpropertytrust.com

DISCLAIMER Babcock & Brown Japan Property Management Limited (“Responsible Entity”) (ABN 94 111 874 563) is the Responsible Entity of Babcock & Brown Japan Property Trust (“The Trust”) (ARSN 112 799 854). The Responsible Entity is a subsidiary of Babcock & Brown Limited (“B&B”) (ABN 53 108 614 955).

Investments in the Trust are not liabilities of B&B or any entity in the Babcock & Brown Group, and are subject to investment risk including possible loss of income and capital invested. Neither the Responsible Entity nor any member of the Babcock & Brown Group guarantees the performance of the Trust or the payment of a particular rate of return on the Trust’s securities.

The information contained in this report does not constitute an offer of, or invitation for subscription or purchase of, or a recommendation of, securities in the Trust. In providing this report, the Responsible Entity has not considered the investment objectives, financial situation and particular needs of an investor. Before making any investment decision with respect to securities issued by the Trust, an investor should consider its own investment objectives, financial circumstances and needs, and if necessary consult appropriate professional advisers.

The Responsible Entity is not licensed to provide financial product advice. This report is for general information only and does not constitute financial product advice, including personal financial product advice.

The Responsible Entity, as the Responsible Entity of the Trust, is entitled to fees for so acting. The Trust and its related corporations, together with their officers and directors and officers and directors of the Trust, may hold securities in the Trust from time to time.

This report may include information forecasting or projecting future outcomes. Such outcomes may be affected by a wide range of influences outside of the Responsible Entity’s control. In respect of such forward‑looking information, no representation or warranty is made by or on behalf of the Responsible Entity that any projection, forecast, forward-looking statement, assumption or estimate contained in this report should or will be achieved.

This Annual Report for the Trust has been prepared to enable it to comply with its obligations under the Corporations Act, to ensure compliance with the ASX Listing Rules and to satisfy the requirements of the Australian accounting standards. The responsibility for preparation of this Annual Report and any financial information contained in this Annual Report rests solely with the directors of the Responsible Entity as the Responsible Entity of the Trust.

The Board of BBJPM is responsible for protecting the rights and interests of all BJT Unitholders and is accountable to investors for the overall governance and management of BJT. At 1 September 2008, BJT had 3,501 Unitholders and a market capitalisation of approximately A$425 million.

Note: Japanese appearing in this report is for decoration purpose only. No accuracy of translation is warranted.

Annual Report BABCOCK & BROWN JAPAN PROPERTY TRUST Annual Report 2008

www.bbjapanpropertytrust.com

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